The growth in Federal Reserve expenses was caused by significant increases that occurred in expenses for bank supervision and regulation, personnel compensation, and extensive automation modernization and consolidation. The Increase in the Cost of the Federal Reserve Outpaced Inflation and Total Federal Discretionary Spending

From 1988 to 1994, as shown in figure 2.1, Federal Reserve operating expenses increased from $1.36 billion to $2.00 billion. During 1988 to 1994, the total of the surplus accounts systemwide increased 79 percent, from $2.1 billion in 1988 to $3.7 billion in 1994. Recommendations to the Board of Governors of the Federal Reserve

We recommend that the Board of Governors review pay and benefits levels at the Board and the Federal Reserve Banks to determine if current levels can continue to be justified in today’s environment of increased governmental and private-sector cost containment; assess whether managing the Federal Reserve’s health care coverage on a systemwide basis could reduce health care costs; review travel policies at the 12 Reserve Banks and change those policies review contracting and procurement practices at the 12 Reserve Banks to ensure that these practices are in compliance with the system acquisition guidelines and result in cost-effective contracts; ensure that the “best practices” in contracting and procurement at the 12 Reserve Banks are regularly identified, disseminated, and adopted by the Reserve Banks; and review policies regarding the size of the surplus account and determine if opportunities exist to decrease the amount held in the account. The Federal Reserve has raised strong objections to a new regulatory system in which its role in direct bank supervision would be eliminated or substantially reduced. In chapter 5, we focus on strategic planning and how the Federal Reserve can take steps to proactively manage for these current and future challenges.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the operations of the Federal Reserve System, focusing on: (1) its finances and levels of spending; (2) areas where spending could be reduced; and (3) actions the Federal Reserve could take to meet future challenges in systemwide management.

What GAO Found

GAO found that: (1) Federal Reserve operating expenses increased from $1.36 billion in 1988 to $2 billion in 1994; (2) the most significant operating cost increases were for bank supervision and regulation, personnel pay and benefits, and extensive modernization and consolidation of information systems; (3) operating costs vary among reserve banks because the Federal Reserve has not established consistent policies; (4) the Federal Reserve could reduce its personnel benefits and travel-related reimbursements, and realign its contracting and procurement practices; (5) a reduction or elimination of the Federal Reserve surplus account, which increased from $2.1 billion in 1988 to $3.7 billion in 1994, would increase federal budgetary receipts in the year that the reduction or elimination occurs; (6) major developments such as increased competition from private-sector suppliers, use of electronic banking, and consolidation of the banking industry, are likely to affect the Federal Reserve's operations, future role, and management structures; and (7) the Federal Reserve must eliminate the weaknesses in its planning, budgeting, oversight, and audit processes that impede its cost control efforts.