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Fed's check clearing business scrutinized

The Federal Reserve Board, criticized for rising expenses in an era of government austerity, should focus on streamlining services to banks such as its massive check clearing business, officials said Friday.

"That area is where the biggest potential savings are," said Charles Bowsher, comptroller general of the General Accounting Office told the Senate Banking Committee.

The panel held an oversight hearing on the Federal Reserve, the nation's central bank, amid a GAO report showing Fed operating expenses rose 47 percent from $1.36-billion in 1988 to $2-billion in 1994 _ twice the amount of inflation.

Federal Reserve Board chairman Alan Greenspan defended the Fed as conducting its operations efficiently and within budget.

Greenspan said the Federal Reserve "is as well-run an organization as any with which I have been associated, public or private, over the decades. Is there nonetheless room for improvement? Certainly."

He urged the Senate to consider the expenses within the context of the Fed's diverse role as central bank, regulator and provider of financial services.

In a related move, Sens. Harry Reid, D-Nev., and Bryan Dorgan, D-N.D., introduced a bill that would require the Fed to turn over a $3.7-billion surplus to the Treasury and that would have Congress control Fed spending on activities that don't involve monetary policy.

About 70 percent of the Fed's expenses are for financial services to banks such as check clearing and wire transfers that have nothing to do with the central bank's monetary policy mission. About 22 percent of the Fed's work force alone is employed in check clearing, and the central bank's market share in the business is declining while expenses continue to rise, the GAO said.

Private check clearinghouses are gaining market share from the Fed because of advances in technology. In addition, the bank merger craze has reduced the number of banks nationwide, shrinking the available market.

Greenspan agreed with the panel that the trends in check clearing "are disturbing us quite extensively" and said it represented a serious long-term issue for the central bank.

Sen. Lauch Faircloth, R-N.C., urged Greenspan to consider the impact on small banks if the Fed chose to exit the check clearing business. Small banks could be left without an option in the private sector for check clearing, which would threaten their existence, Faircloth said.

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