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The Federal Reserve Banks as fiscal agents and depositories of the United States.

Gerald D. Manypenny and Michael L. Bermudez, of the Board's Division of Reserve Bank Operations and Payment Systems, prepared this article.

The Federal Reserve, the nation's central bank, is also the U.S. government's bank. Its role in providing banking services to the government is based on the Federal Reserve Act, which provides that, when required by the Secretary of the Treasury, the Federal Reserve Banks shall act as "fiscal agents" and "depositories" of the United States. As fiscal agents of the U.S. Treasury, the Reserve Banks provide debt-related services--issuing, servicing, and redeeming Treasury securities and processing secondary market transactions initiated by depository institutions. As depositories, the Reserve Banks provide payment-related services--handling the government checking account and disbursements and collections.

Today, the Federal Reserve Banks also provide banking services on behalf of many domestic and international government agencies, but the bulk of the activity is for the U.S. Treasury. The Treasury-related transactions are large: For example, the Federal Reserve Banks on average process about $476 billion per business day in privately owned, marketable Treasury securities transactions and handle $16 billion per year in sales and redemptions of U.S. savings bonds; and per average business day, they process about $6 billion in tax, fee, and loan receipts and about 4 million disbursements by check and wire.

This article describes the nature of the principal fiscal and depository services required by the U.S. Treasury; explains how the Federal Reserve Banks meet those requirements; surveys other fiscal and depository services performed by the Reserve Banks; and discusses the direction of developments in certain service areas.


The Federal Reserve Act of 1913, which created the Federal Reserve System, authorized the Federal Reserve Banks to provide fiscal agency and depository services to the Department of the Treasury. It was not until 1915, however, that Secretary of the Treasury W.G. McAdoo appointed the Federal Reserve Banks to act on behalf of Treasury. To that end, U.S. government funds on deposit with national banks were transferred to Treasury's account at each Federal Reserve Bank. These accounts established the Reserve Banks as Treasury's depository--the intermediary through which Treasury collects and disburses funds on behalf of the federal government; thus, the Federal Reserve literally acquired the government's checking account.

Since then, many other services, both for Treasury and for other agencies, have been added to the deposit services provided by the Reserve Banks. The Reserve Banks' fiscal agency role dates from May 1917, when they began the distribution, safekeeping, and redemption of the First Liberty Loan Bonds, offered by the government to finance the U.S. effort in World War I. The success of that offering, the effectiveness of the Reserve Banks in handling Treasury's accounts since 1915, and the government's growing need to borrow influenced Treasury in 1921 to end its network of Subtreasuries--field offices that gave Treasury access to regional money centers--and to transfer to the Federal Reserve many of the operational functions related to financing the public debt.

The massive financing required to wage World War II brought the next significant expansion in the Banks' fiscal agency role, handling the series E savings bond introduced in 1941. In the late 1960s, the Federal Reserve Banks began providing services--primarily securities-related--for other U.S. government and international agencies.


The Reserve Banks' fiscal agency and depository responsibilities to Treasury are authorized by statute, and the operating mechanisms are subject to Treasury regulations. In the main, Reserve Bank services for Treasury involve the two entities comprising the Treasury Fiscal Service: the Financial Management Service, for depository services, and the Bureau of the Public Debt, for debt-related operations.

Depository Services

The Reserve Banks' depository services to Treasury are related to their involvement in the wider payments system. Since its inception, the Federal Reserve has had a major influence on the nation's payments mechanism. The Reserve Banks provide payments services to depository institutions that include check processing, funds transfers, and automated clearinghouse (ACH) payments. These activities in the private sector give the Federal Reserve a base for providing similar services to Treasury and to assist Treasury with improvements and innovations in those services.

As depositories of the United States, the Federal Reserve Banks maintain Treasury's checking account, clear checks drawn on that account, accept deposits of federal taxes and fees, and make electronic payments on behalf of Treasury. In all these matters, the Reserve Banks serve Treasury's Financial Management Service, whose responsibilities include the government's systems for collections and payments, central accounting and reporting, and cash management.

Handling Tax Payments and Loan Proceeds

Payroll and corporate income taxes reach the government through two channels: the Federal Reserve and depository institutions. Tax payments that are sent directly to a Reserve Bank are placed in a Treasury checking account at that Bank. Tax payments that are sent to a depository institution are placed by the institution in a Treasury demand deposit account called a Treasury tax and loan (TT&L) account, in which the institution may hold the funds overnight without paying interest to Treasury.

A depository institution with a TT&L account falls into one of two classes: "remittance-option banks" and "note-option banks." A remittance-option bank agrees to remit its TT&L balances to the Federal Reserve the day after receipt.

A note-option bank chooses to accumulate the daily tax payments it receives, up to a preapproved limit, by shifting them to another account; that is, after the overnight, interest-free holding period in the TT&L account, the note-option bank moves tax receipts into an interest-beating "note account" that is still available to the Treasury on demand. As it transfers funds from the TT&L account to the note account, the note-option bank updates the note that Treasury holds as a claim on the note account. Note-option banks report the amounts they receive in their TT&L accounts to a Federal Reserve office as well as to the Internal Revenue Service. In 1991 the Reserve Banks processed 6.7 million advices of credit, representing more than 80 million tax payments. Businesses deposited about $838 billion in tax payments to depository institutions in calendar year 1991; about two-thirds went to note-option banks and the remainder to remittance-option banks.

TT&L balances are counted by the Federal Deposit Insurance Corporation (FDIC) as insurable deposits; therefore up to $100,000 of such a balance at an institution is insured against loss by FDIC insurance. Amounts in the TT&L account in excess of $100,000 must be fully covered by collateral in the form of Treasury-authorized securities deposited by the TT&L institution at its Reserve Bank. Note accounts are not insured by the FDIC and therefore must have 100 percent of their balance covered by collateral. Reserve Banks monitor TT&L and note account balances against the value of the collateral and handle excess balances under rules prescribed by Treasury.

To maximize interest earnings and still keep adequate funds to cover its payments, Treasury aims to maintain a closing balance of $5 billion in its Federal Reserve checking accounts each day; if Treasury estimates that the balance will be significantly in excess of that amount, the Reserve Banks will determine an amount to be placed, in a process called direct investment, in the TT&L accounts of note-option banks with sufficient collateral. The influx of funds to Treasury accounts at the Federal Reserve and at depository institutions can be greater than expected because, say, of unusually heavy quarterly tax payments. At such times, finding note-option banks with the capacity to receive the direct investment of Treasury funds that are overflowing the Reserve Bank accounts can become difficult.

On average, however, Treasury makes payments from its Federal Reserve checking accounts in excess of the taxes and fees received in those accounts. (1) Therefore, it generally must draw down or "call" note-account funds to meet its cash needs. Because the Federal Reserve Banks maintain accounts for many depository institutions, the Reserve Banks are able to serve as the vehicles through which Treasury calls note-account funds. Finally, because the government operates at a fiscal deficit, Treasury on average makes payments from its Federal Reserve checking accounts in excess of all its tax and fee receipts and therefore must place additional funds in its checking and note accounts by issuing net new debt (see boxes, "Making Funds Available to Cover Social Security Payments" and "A Day's Activity in the Government's Checking Account").

Payments via ACH

The federal government disburses the majority of its payments to the public from funds on deposit with the Federal Reserve Banks. For recurring payments such as social security benefits and salaries, the government uses the Federal Reserve's automated clearinghouse (ACH), an electronic network that allows the reserve account of a depository institution to be credited for payments from Treasury's checking account on a specified settlement day. The ACH network eliminates problems with lost, stolen, or forged Treasury checks. Through Treasury's Direct Deposit program, for example, more than 23 million government workers and benefits recipients have their pay or benefits deposited directly into a checking or savings account via the ACH. The number of government ACH payments has been growing and in 1991 exceeded for the first time the number of government payments made by check (chart 1 ).

The government pays many of its vendors through Vendor Express, another electronic payment program that uses the ACH. More than thirty-two federal agencies use Vendor Express, and for 1992 Treasury expects the program to process more than 3.7 million payments.

Fiscal Agency Services

The federal government creates debt to cover the shortfall between receipts and expenditures and to refinance maturing debt. Most of the federal debt consists of Treasury securities, with securities issued by other federal agencies accounting for the rest. Managing this debt is one of the primary responsibilities of the Department of the Treasury. The size of marketable Treasury debt issues has grown approximately 11.5 percent per year over the past ten years, from about $600 billion in 1981 to $1.7 trillion in 1991.

The Federal Reserve Banks, as fiscal agents, play an integral role in carrying out Treasury's financing decisions. Treasury auctions, conducted by the Treasury through the Federal Reserve, determine the yield of securities being sold. To initiate borrowing, Treasury announces. the terms and conditions of the securities being offered, and invites investors to submit tenders (offers to purchase securities) to the Federal Reserve Banks and Branches and Treasury's Bureau of the Public Debt (BPD).

Typically, nearly 20,000 investors submit tenders to the Reserve Banks and the BPD. Most of the issue amount is purchased by about seventy-five to eighty-five "competitive" bidders-- investors who specify the rate or yield at which they want to purchase the securities. The majority of the bidders are "noncompetitive," entering tenders in amounts of $1 million or less for Treasury bills and $5 million or less for Treasury notes and bonds and agreeing to accept the weighted average yield of accepted competitive bids. The Reserve Banks review the tenders they receive for accuracy, completeness, and compliance with Treasury's rules and guidelines and refer any questionable tenders to Treasury for a determination. At the conclusion of the review process, the Reserve Banks compile auction summaries and forward them to the BPD.(2)

Once Treasury determines which tenders are to be accepted, it makes a public announcement of the auction results, and the Reserve Banks issue the securities in exchange for payment. These payments are deposited to Treasury's account at the Reserve Banks on the day the securities are issued. Simultaneously, the Reserve Banks, still acting as fiscal agents of the United States, create "book-entry securities"--computer records of the securities--rather than issue paper certificates.

Marketable Book-Entry Securities

Thirty-five Federal Reserve Banks and Branches, as fiscal agents, maintain two marketable book-entry securities systems for Treasury: commercial and Treasury Direct.(3) As the obligor of the securities; Treasury maintains accountability for the total value of all marketable securities outstanding.

Commercial book entry. The commercial book-entry system, initiated in 1967, facilitates the safekeeping and transfer of large volumes of marketable Treasury securities through the substitution of computerized accounts for paper securities. It thereby contributes to the efficiency and liquidity of the government securities market. Private owners or custodians of commercial book-entry securities maintain them in accounts at depository institutions, which in turn maintain them in Reserve Bank book-entry accounts. As fiscal agents, the Reserve Banks maintain the book-entry securities accounts, reconcile activity in them, issue transaction advices and account statements, and credit interest and principal to the accounts of depository institutions.

Through a process called delivery versus payment, the book-entry system provides for the electronic, integrated settlement of securities transfers and corresponding funds transfers. That is, over Fedwire (the Federal Reserve' s system for electronically transmitting funds and securities on its communications network), a depository institution can access its book-entry account at its Reserve Bank to transfer securities to any other domestic depository institution that has a Reserve Bank account. Also on Fedwire, concurrently with the securities transfer, the sender's Reserve Bank credits the sender's reserve account with payment for the security while the Reserve Bank of the receiving institution debits that amount from the account of the receiver. This securities transfer and payment mechanism is the heart of the secondary government securities market.

The method by which depository institutions access the Fedwire book-entry system generally depends on their volume of use. Institutions with large volumes of securities transfers usually have a computer-to-computer link with their Federal Reserve Bank. Institutions with relatively low volumes are connected by telephone lines to their Reserve Banks via personal computer links that use proprietary Federal Reserve software known as Fedline .(4)

Through either type of link, instructions for securities transfers flow automatically from an institution to the local Reserve Bank computer. The message identifies the sending and receiving institutions, describes the securities issue and par amount to be transferred, and payment information. The computer edits the message for acceptability and verities that the sender has the securities in the designated account. When the transaction is complete, both institutions receive acknowledgements.

The commercial book-entry system has proved to be safe and reliable; and because it provides broad, easy access to the secondary securities market, it enhances the liquidity of government securities. On an average business day in 1991, depository institutions originated more than 44,000 securities transfers valued at $476 billion, for an average value of $10.75 million per transfer (table 1).

Treasury Direct. In the mid-1980s Treasury decided to eliminate use of marketable paper securities for new offerings in favor of book-entry issuance. Depository institutions already relied primarily on the commercial book-entry system for secondary market transactions; and individuals and organizations that hold their securities through a fee-based account at a depository institution indirectly participate in commercial book-entry.

But commercial book-entry did not cover individuals for whom a direct relationship with Treasury was important and who therefore held paper securities; and it did not cover the organizations, typically small, that also chose not to hold their Treasury securities in a commercial bank account. Treasury's decision meant that, to continue serving such investors directly, it would need to create a special book-entry system suited to their needs. The proportion of marketable Treasury debt held by nondepository institutions and individuals is less than 10 percent; but most of the 10 percent is held to maturity and so is better suited to a custodial type of accounting system than to the transfer-oriented service provided to depository institutions by commercial book entry.

The Federal Reserve Bank of Philadelphia was selected by Treasury to operate the new book-entry custodial system, called Treasury Direct. Treasury Direct maintains accounts primarily for individuals and nondepository institutions, credits payment on them, and distributes investor information.

Treasury Direct is both highly successful as an operating system and popular with investors. Not only has it criminated the issue of physical, marketable securities to individuals and nondepository institutions, but it also has virtually ended all paper check payments to them; instead, interest payments and redemption proceeds are deposited electronically through ACH in an account designated by the investor.

The value and number of accounts under Treasury Direct has grown strongly, and the system is handling transactions at a far lower cost than that entailed by physical securities. At the end of June 1992, there were 1.1 million investor accounts in Treasury Direct with par value of more than $63.5 billion, compared with $22.6 billion in 392,000 accounts at the end of 1987. In 1985, the cost of a transaction involving a physical, marketable Treasury security was about $20; in 1991, the cost of completing a Treasury Direct transaction was about $2.50.

Smart Exchange. Treasury recently initiated "Smart Exchange," a program to persuade investors to convert their paper securities to book-entry form. The Reserve Banks are communicating with depository institutions on Treasury's behalf to enlist them in the effort to encourage customers to convert their securities to the commercial book-entry system or to Treasury Direct. Conversion to book entry enables customers to take advantage of better account maintenance, processing, and payment. Treasury hopes to eliminate all outstanding paper securities and move to total book entry by the year 2000.

Savings Bonds

The U.S. savings bond is a low-denomination, non-marketable Treasury security that is easily purchased, liquid, and safe--its principal and interest are guaranteed by the U.S. government.5 The savings bond is thus an important vehicle for household savings that, in addition, funds a portion of the federal deficit.

Treasury's savings bond offerings today consist of series EE bonds, the interest earnings on which accrue until the bond matures or is redeemed, and series HH bonds, which are obtained in exchange for series E or series EE bonds and pay interest twice per year, via ACH, to the owner's designated depository institution.6 The savings bond program is a stable and sizable source of debt financing for the government. Since the introduction of the series EE bond in 1980, more than 50 million investors have purchased them.

The savings bond services of the Reserve Banks include sale and delivery; automated issuance of payroll and promotional bonds; denominational exchanges; exchanges of accrual bonds for income bonds; and reissuance, replacement, and redemption. The number of bonds issued by the Banks-- more than 36 million in 1991--has grown more than 10 percent per year for the past five years.

The Federal Reserve Banks work closely with Treasury to improve service and efficiency in savings bond operations. For example, with the sustained growth in the savings bond program, certain functions have been consolidated to enhance effectiveness. The Federal Reserve Bank of Philadelphia is Treasury's central site for interest payments on the series H and HH current-income savings bonds. The Pittsburgh Branch of the Cleveland Reserve Bank manages the original issue, reissue, redemption, and account maintenance of the special book-entry trustee accounts. The Pittsburgh Branch also warehouses unissued savings bond stock received from the bond printer for distribution to the other Federal Reserve offices and to companies and federal, state, and local government entities that issue bonds to employees through the payroll savings plan.

To improve the efficiency and reduce the cost of issuing savings bonds, Treasury introduced the Regional Delivery System (RDS) in 1989, after two years of pilot studies with the Federal Reserve. Before RDS, series EE savings bonds purchased "over the counter" from an issuing agent, such as a commercial bank, were conveyed directly to the buyer at the time of purchase. With RDS, investors submit an application to the issuing agent, who forwards the registration and delivery information to one of eleven Federal Reserve offices (the Kansas City District serves itself and the San Francisco District), which then issues and mails the bond. Treasury estimates that, by the end of 1992, when RDS is fully implemented, the system will save U.S. taxpayers more than $10 million per year in administrative costs and will facilitate further technological innovations.(7)

Currently, the eleven Federal Reserve Districts with savings bond operations use two different savings bond automation systems. As a result of a recent study, Treasury has decided to consolidate Reserve Bank savings bond operations in five Reserve Bank Districts and to develop in the next few years a single automated application to support these functions.


Notable developments have occurred in recent years in both depository and fiscal agency services. In the payments area, work is progressing toward automation of tax payments and letter-of-credit operations. In fiscal services, a system to speed the clearing of paid savings bonds was adopted nationwide last year, after three years of testing; the Federal Reserve's PC-based Fedline system is about to be opened for use by institutional bidders wishing to submit bids electronically in Treasury securities auctions; a new Public Debt Accounting and Reporting System is being introduced; and a new commercial book-entry securities software system is under development.

Electronic Tax Collections

The Federal Reserve System is supporting Treasury's Federal Tax Deposit (FTD) Redesign, a joint effort of the Financial Management Service and the Internal Revenue Service to eliminate paper documentation, accelerate Treasury's receipt of funds, and enhance Treasury's cash management and tax payment information.

As part of FTD Redesign, the Federal Reserve Banks of Minneapolis and Atlanta, in their roles as depositories for Treasury, are conducting a test of an electronic system of tax payment for businesses called Taxlink-FRB. In the test, limited to business payments of federal taxes from Georgia, participating depository institutions electronically report federal tax deposit payments via touch-tone telephone or PC to the Minneapolis Reserve Bank for TT&L processing. Minneapolis electronically transmits the information to the IRS Taxlink system to update taxpayer accounts.

Letters of Credit

The Federal Reserve Banks, acting for Treasury, maintain and service letters of credit for the benefit of grantees of government funds, such as housing, health, and educational organizations and institutions. The letters of credit issued by a federal agency for the benefit of these organizations describe the funds available and conditions under which funds may be drawn down.

Letter-of-credit operations, conducted in all Reserve Banks, are basically manual processes to account for balances, verify requests for payment, and verify the actual payments. To initiate a letter of credit, the federal agency, via the Financial Management Service, asks a Reserve Bank to establish an account. When the recipient organization requests funds, its depository institution asks that the Reserve Bank, as Treasury's depository, credit its reserve account for the amount of the request. If the payment request meets the terms of the letter-of-credit, the Reserve Bank debits Treasury's general account and credits the depository institution's reserve account.

The Federal Reserve Banks processed 38,000 letter-of-credit transactions in 1991 involving more than $133 billion. At the request of Treasury, the Federal Reserve Bank of Richmond is developing a computerized application, which will replace the present manual operations, to be operated at a single Reserve Bank. Fedwire, the Federal Reserve's electronic transfer system for funds and securities, will be used both to request and to transfer payment.

EZ Clear

In October 1988, Treasury, with the assistance of the Federal Reserve, implemented EZ Clear as an alternative to the increasingly costly traditional procedures for processing savings bonds paid by depository institution agents acting for Treasury. Those procedures required paying agents to submit paid bonds in special batches, apart from the check-clearing process, for crediting to their reserve accounts. With EZ Clear, paying agents process the savings bonds they redeem for their customers in the manner they use to process checks. In early 1991, EZ Clear became the exclusive method for processing paid savings bonds.(8)

The savings bonds were redesigned to facilitate check-like processing by the depository institutions and the Reserve Banks, with routing numbers printed in machine-readable magnetic ink, space for magnetic-ink printing of paid amounts, and an endorsement area similar to that on Treasury checks. Depository institutions report that EZ Clear reduced handling expenses for paid bonds, accelerated credits, and streamlined internal accounting.


A PC-based link to the Federal Reserve communications network makes computer transactions more feasible for smaller banks. More than 8,000 depository institutions, with electronic connections at more than 10,000 locations throughout the country, use the PC link, known as Fedline, to transfer securities and funds, to originate and receive ACH files, to transmit federal tax deposit advices to the Reserve Banks, and to fulfill various other fiscal and depository needs.

Earlier this year, Treasury's Bureau of the Public Debt announced its intention to make available electronic access to Treasury security auctions via the Reserve Banks. At Treasury's direction, the Reserve Banks, through Fedline connections, will offer institutional bidders the means to submit bids electronically.

Public Debt Accounting and Reporting System

Accounting for the public debt and the related interest cost is the responsibility of Treasury's Bureau of the Public Debt. Daily financial reports on transactions affecting the debt come to the BPD from the Reserve Banks, which every day collect and pay funds for the issue and redemption of Treasury securities. One of Treasury's primary strategic objectives is to improve current methods for reporting and reconcilement, which are costly and cumbersome; they involve a great deal of paper, prevent the BPD from reconciling debt accounts quickly, and delay the verification to the Reserve Banks that the data submitted are accurate.

The Federal Reserve Bank of Cleveland, in conjunction with the BPD, designed and created the Public Debt Accounting and Reporting System (PARS) to meet Treasury's goal of strengthening and streamlining the BPD accounting system. As implemented in September 1992, PARS produces timely reconciliation of accounting data and more accurate financial statements, allowing adjustment of differences on line with the Reserve Banks and Branches.

New Book-Entry Securities System

The Federal Reserve operates two commercial book-entry software systems: One operates in ten Federal Reserve Districts and the other in two DiStricts. To position the Reserve Banks to meet future needs of the book-entry business in general and of fiscal principals in particular, the Federal Reserve has decided to develop a new book-entry application for nationwide use.

The new system will operate at a single site with one "electronic vault" for records of Treasury and agency book-entry securities. Furthermore, the system will take advantage of technological advances that will provide comprehensive contingency capabilities as well as flexibility to address future business needs, whether they come from the fiscal principals or result from policy decisions made by the Federal Reserve.


When required to do so by the Secretary of the Treasury or when required or permitted to do so by federal statute, the Reserve Banks perform fiscal agency and depository services for other domestic and international agencies. Depending on the authority under which services are provided, the Reserve Banks may (1) maintain depository institution accounts of agency book-entry securities (which may be transferred over Fedwire), (2) provide custody services and maintain and update balances of book-entry and definitive securities outstanding, (3) maintain cash accounts, credit interest and principal at maturity of securities, and perform various other securities servicing activities after original issue.(9)

The Federal Reserve Bank of New York is the primary fiscal agent or depository of most non-Treasury domestic agencies and entities that use the Federal Reserve. A list of selected non-Treasury agencies and entities that currently receive fiscal and depository services directly from Reserve Banks is in the appendix.


In 1917, Treasury Secretary McAdoo initiated the practice of "reimbursing" the Reserve Banks for the cost of services they were providing on behalf of the government. Secretary McAdoo reasoned that the performance of such services simply could not be imposed by legislation; rather, the provision of such services by the Reserve Banks "could only be accomplished by negotiation and agreement, involving, necessarily, compensation for the services provided." A few years later, the Congress enacted legislation that permitted the use of public monies to reimburse Reserve Banks for the costs associated with their governmental services.

Today, the Federal Reserve expects to be compensated for the costs of the Reserve Banks' fiscal agency and depository services on behalf of Treasury and other agencies (table 2). Treasury, however, has not been able to obtain congressional funding sufficient to fully reimburse the Reserve Banks. Of the $212 million spent by the Reserve Banks on Treasury fiscal and depository services in calendar year 1991, the Federal Reserve requested reimbursement for $152 million in accordance with Treasury directives; of the $152 million, Treasury actually paid $62 million, or about 30 percent of total expenses? The Reserve Banks received virtually full reimbursement from agencies other than Treasury for the $41 million in expenses incurred in 1991 for fiscal and depository services provided on theft behalf.

In 1990, the Congress enacted "permanent, indefinite" appropriation legislation to provide money to reimburse the Reserve Banks for the public-debt-related operating expenses incurred on behalf of the Bureau of the Public Debt, excluding the costs of start-up programs and other initiatives, beginning in fiscal year 1992.

Full reimbursement of expenses incurred as fiscal agents and depositories is an important public policy concept for two reasons. First, congressional oversight of agency program budgets provides an important discipline that is lost with respect to fiscal agency and depository services unless the entities receiving the services include the costs in their appropriations requests. Second, when services are provided at no cost or are subsidized, they tend to be over-used and less efficient than if they were obtained in a more market-oriented manner governed by cost and quality. In the case of functions performed by the Federal Reserve, the expense of full reimbursement would induce Treasury and other agencies to compare the level and quality of Reserve Bank services and costs with those of commercial providers of similar services and to seek out the most efficient service provider. Ultimately, therefore, such comparison would subject the government-mandated services of the Reserve Banks to competition from private firms.


The Reserve Banks' financial services to government and their financial services supporting the general payments mechanism for depository institutions gain efficiency from their joint use of Federal Reserve equipment, facilities, and personnel. These services will continue to be transformed by technological change. Government payments systems are likely to be redesigned to take greater advantage of electronic mechanisms, and paper-intensive activities will be further automated. More services will be delivered electronically, and time-critical operations ranging from auctions for Treasury securities to the crediting of government benefits will become more reliable, timely, and efficient as new capabilities are applied.

The technological evolution is well illustrated by a current pilot project that has advanced the prospect of purely electronic financial transactions between the government and the public. In the short run, a successful outcome to the experiment, which involves corporate taxpayers in Georgia, could mean that millions of paper advices now submitted by taxpayers to depository institutions could be replaced by electronic messages that taxpayers initiate from a touch-tone telephone or computer. All parties--taxpayers, depository institutions, Reserve Banks, and the IRS--would be spared the effort of preparing and filing paper statements, and Treasury's cash managers would be aware of receipts almost immediately.

In the long run, the elaboration of electronic connections and accounts may permit all government payments and collections to be initiated by telephone or computer through the Reserve Banks, thereby eliminating paper checks as the means of receiving money from, or paying, the U.S. government.


African Development Bank

Asian Development Bank

Department of Agriculture Commodity Credit Corporation Food and Nutrition Service

Department of Housing and Urban Development

Farm Credit Administration

Farm Credit System Financial Assistance Corporation

Department of Education

Federal Home Loan Banks

Federal Home Loan Mortgage Corporation

Federal National Mortgage Association

Financing Corporation

Inter-American Development Bank

International Bank for Reconstruction and Development

International Finance Corporation

Resolution Funding Corporation

Resolution Trust Corporation

Student Loan Marketing Association

Tennessee Valley Corporation

U.S. Postal Service

Making Funds Available to Cover Social Security Payments

Treasury maintains its excess cash in interest-beating "note accounts" at depository institutions. This working capital is transferred periodically to supplement funds already in Treasury's checking accounts in the Reserve Banks and, over a several-day period, to cover Reserve Bank payments of checks and direct deposits to social security recipients.

In the case of social security payments, Treasury estimates its current receipts and payments due in its Reserve Bank accounts once the amount of a monthly social security payment is known. It then instructs the Reserve Banks to "call" (transfer) a portion of noteaccount balances from institutions across the country to provide the estimated additional funds necessary to cover the direct deposits and checks cashed over the several days following the social security payment.

Social security payments are covered from the assets of the social security trust fund. Treasury redeems-- that is, stops paying interest on--a portion of the fund's holdings of Treasury securities equal to the amount of social security payments it estimates actually clears each day following the benefit payment. The Federal Reserve periodically conducts a nationwide statistical survey of patterns in social security check payments. The data from this survey are used by Treasury to determine the timing of redemptions of the trust fund investments.

A Day's Activity in ie Government's Checking Account

Treasury's checking account actually consists of multiple checking accounts at the Reserve Banks and Branches, the reconciliation of which is centralized at the New York Reserve Bank.

Treasury's current cash-management objective is to maintain a daily operating balance of $5 billion in its checking account. In terms of flow, Treasury received an average of about $5 billion per day in taxes and fees during fiscal year 1991. The funds were placed in Treasury's Federal Reserve checking account or in interest-bearing "note accounts" at depository institutions. Concurrently, Treasury disbursed on average about $6 billion per business day in fiscal 1991 (the calculations are based on 250 business days per year).

Hence, on average, for each business day in 1991, the government could cover all but about $1 billion of its expenditures with taxes and fees received that day in the checking account or drawn down from the note accounts. The daily average difference of roughly $1 billion had to be covered in the checking account with net proceeds from debt offerings and, over the course of 250 business days, became the fiscal 1991 deficit of $269 billion.

1. Depository institutions and Reserve Banks also receive a wide variety of other deposits, including fees collected for use of National Park facilities, payments received from leases of mineral rights on public lands, and personal checks sent to the IRS on April 15 by individuals whose employers did not withhold enough income tax. These receipts are deposited by the receiving agencies in so-called Treasury General Accounts (TGA) at depository institutions and are swept the next day into the Treasury's Reserve Bank checking accounts.

2. See Treasury Bulletin (December 1991), pp. 7-8.

3. The Helena Branch does not handle book-entry securities, and the El Paso Branch handles only Treasury Direct. Treasury Direct is a registered trademark of the Department of the Treasury.

4. Fedline is a registered trademark of the Federal Reserve System.

5. Depending on the series, the face values of savings bonds range from $50 to $10,000, and the bonds are sold at 50 percent to 100 percent of face value. Individuals can buy them through most depository institutions and by payroll deduction at many places of employment and can redeem them any time after six months of ownership at most depository institutions or, depending on the series, at Reserve Bank offices.

6. Other features of the current savings bond program are that series EE bonds earn interest on a fixed, graduated scale, rising from about 4 percent to the minimum 6 percent rate for bonds held between six months and five years. Between five years and the date of redemption, the series EE bond yields ie greater of 6 percent or 85 percent of the average return on all marketable Treasury securities with a remaining maturity of five years. At 6 percent, series EE bonds reach face value in twelve years; unless redeemed, the bonds accrue interest for a total of thirty years. The interest on series EE bonds is exempt from federal tax if owners meeting certain conditions redeem them for qualified educational expenses.

7. The savings is the sum of (1) the reduction in agent fees because agents no longer issue the roughly 30 million bonds bought over the counter each year and (2) the savings of the cost of consigning stock to more than 40,000 issuing agents, less the increase in Reserve Bank operating costs associated with issuing the bonds, including postage.

8. EZ Clear permits depository institutions to submit paid bonds either as a separately sorted cash letter (that is, one containing only paid bonds) or as a mixed cash letter (along with other checks forwarded for collection). Agents presenting bonds under a separately sorted cash letter receive a fee from Treasury for performing that service. Agents presenting bonds as part of a mixed cash letter receive no fee.

9. Unlike Treasury securities, agency securities cannot be purchased directly from a Federal Reserve Bank. The issuers generally rely on securities dealers, including some commercial banks, to distribute original issues.

10. Board of Governors of the Federal Reserve System, Annual Report: Budget Review, 1991-92 (Washington, D.C.: Board of Governors, 1992), p. 28, tables 3.8 and 3.9, and p. 62, table D.2. For an explanation of the calculation, see the Annual Report: Budget Review, 1987-88 (Board of Governors, 1988), p. 35, note 1. See also Board of Governors of the Federal Reserve System, 78th Annual Report, 1991 (Board of Governors, 1992), p. 256.
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Author:Bermudez, Michael L.
Publication:Federal Reserve Bulletin
Date:Oct 1, 1992
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The Federal Reserve Banks as Fiscal Agents and Depositories of the United States.
Statements to the Congress.
Guide to Statistical Releases and Special Tables.
Opportunities and Challenges of the U.S. Dollar as an Increasingly Global Currency: A Federal Reserve Perspective.
Federal Reserve Banks as fiscal agents and depositories of the United States in a changing financial environment.
Appointment of Richard W. Fisher as president, Federal Reserve Bank of Dallas.

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