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Formulating the imputed cost of equity capital for priced services at Federal Reserve banks

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Author Info

  • Edward J. Green
  • Jose A. Lopez
  • Zhenyu Wang

Abstract

This paper was presented at the conference "Economic Statistics: New Needs for the Twenty-First Century," cosponsored by the Federal Reserve Bank of New York, the Conference on Research in Income and Wealth, and the National Association for Business Economics, July 11, 2002. According to the 1980 Monetary Control Act, the Federal Reserve Banks must establish fees for their priced services to recover all operating costs as well as the imputed costs of capital and taxes that would be incurred by a profit-making firm. Since 2002, the Federal Reserve has made fundamental changes to the calculations used to set the imputed costs. This article describes and analyzes the current approach, which is based on a simple average of three methods as applied to a peer group of bank holding companies. The methods estimate the cost of equity capital from three perspectives_the historical average of comparable accounting earnings, the discounted value of expected future cash flows, and the equilibrium price of investment risk as per the capital asset pricing model. The authors show that the current approach also provides stable and sensible estimates of the cost of equity capital over the past twenty years.

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Bibliographic Info

Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2003)
Issue (Month): Sep ()
Pages: 55-81

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Handle: RePEc:fip:fednep:y:2003:i:sep:p:55-81:n:v.9no.3

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Keywords: Federal Reserve banks - Service charges ; Bank holding companies ; Bank capital ; Depository Institutions Deregulation and Monetary Control Act of 1980;

References

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Citations

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Cited by:
  1. Michelle L. Barnes & Jose A. Lopez, 2006. "What is the Federal Reserve banks' imputed cost of equity capital?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue apr7.
  2. Alfredo Martín-Oliver & Vicente Salas-Fumás & Jesús Saurina, 2007. "Measurement of capital stock and input services of Spanish banks," Banco de Espa�a Working Papers 0711, Banco de Espa�a.
  3. Gur Huberman & Zhenyu Wang, 2005. "Arbitrage pricing theory," Staff Reports 216, Federal Reserve Bank of New York.
  4. Michelle L. Barnes & Jose A. Lopez, 2005. "Alternative measures of the Federal Reserve banks' cost of equity capital," Public Policy Discussion Paper 05-2, Federal Reserve Bank of Boston.
  5. Massoud, Nadia, 2005. "How should Central Banks determine and control their bank note inventory?," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 3099-3119, December.

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