What Is the Private Sector Adjustment Factor (PSAF)?
The term private sector adjustment factor (PSAF) refers to the method used by the Federal Reserve Board to calculate the costs associated with services provided to depository institutions as if they were provided by private banks. These services include checks and Automated Clearing House (ACH) among others. The PSAF was introduced by the Monetary Control Act of 1980. The PSAF is adjusted and recalculated on an annual basis.
- The private sector adjustment factor is how the Federal Reserve Board calculates the costs associated with services provided to depository institutions.
- The Fed uses this calculation for services provided as if they were provided by private institutions.
- Costs are recovered for services such as checks, Automated Clearing House, and others.
- The PSAF was introduced as part of the Monetary Control Act of 1980.
- The Fed adjusts and calculates the PSAF on a yearly basis.
How the Private Sector Adjustment Factor (PSAF) Works
The Federal Reserve is required to charge for any services it provides to different depository institutions. This rule is part of the Monetary Control Act of 1980. This federal law helped change the way the banking industry is regulated. It created the private sector adjustment factor, a blanket term that includes any hidden or imputed costs and profits. The Fed recovers both direct and indirect costs of providing services plus the imputed costs that would have been incurred if the services were provided by the private sector.
The fees are set each year and are meant to recover at least 100% of these expenses. As mentioned above, this includes services such as:
- Automated Clearing House
- Fedwire funds
- Fedwire securities
- National Settlement Service
- FedLine Solutions
The Fed uses data from publicly-traded banks to formulate its PSAF models. It estimates imputed debt and equity levels, then applies applicable financing rates. The yearly PSAF model is a proforma balance sheet of approximated assets and liabilities, with other inputs imputed as if the Fed-provided services listed above were offered by private sector entities. The same generally accepted accounting principles (GAAP) used by private sector firms are applied by the Fed to develop the financial statements in its model.
The Fed's Board of Governors approved the 2021 PSAF in November 2020 for a total of $16.4 million as per the Monetary Control Act.
The percentage of the total expenses and profits after taxes or return on equity recovered by Reserve Banks for priced services between 2010 and 2019.
The Fed reviews its PSAF methodology periodically to make sure it is current with changes in the banking industry. The Fed changed its price-setting methodology in 2005. It did this so that only the capital asset pricing model (CAPM) is used to determine a return on equity (ROE). Prior to this, the results of three models, including CAPM, were averaged to calculate ROE, which is the underlying basis of the annual fee.
For the CAPM calculation, the three-month Treasury bill rate is the risk-free rate, the beta (the measure of volatility) is assumed at 1.0. The market risk premium is based on 40-year historical monthly returns over risk-free rates. With the derivation of an estimated ROE, the Fed then can calculate the fee for its services to depository institutions. The ROE is a reflection of the expected return of a shareholder in a private entity. The PSAF model calculates how much in fees it charges to reach this ROE.