Formulating the Imputed Cost of Equity Capital for Priced Services at Federal Reserve Banks
نویسندگان
چکیده
he Federal Reserve System provides services to depository financial institutions through the twelve Federal Reserve Banks. According to the Monetary Control Act of 1980, the Reserve Banks must price these services at levels that fully recover their costs. The act specifically requires imputation of various costs that the Banks do not actually pay but would pay if they were commercial enterprises. Prominent among these imputed costs is the cost of capital. The Federal Reserve promptly complied with the Monetary Control Act by adopting an imputation formula for the overall cost of capital that combines imputations of debt and equity costs. In this formula—the private sector adjustment factor (PSAF)—the cost of capital is determined as an average of the cost of capital for a sample of large U.S. bank holding companies (BHCs). Specifically, the cost of capital is treated as a composite of debt and equity costs. When the act was passed, the cost of equity capital was determined by using the comparable accounting earnings (CAE) method,1 which has been revised several times since 1980. One revision expanded the sample to include the fifty
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