Modern
Money Mechanics
A
Workbook on Bank Reserves and Deposit Expansion
Page
20
Changes
in Federal Reserve Float
A large proportion of checks drawn on banks and deposited in other banks
is cleared (collected) through the Federal Reserve Banks. Some
of these checks are credited immediately to the reserve accounts
of the depositing banks and are collected the same day by debiting
the reserve accounts of the banks of which the checks are drawn.
All checks are credited to the accounts of the depositing banks
according to availability schedules related to the time it normally
takes the Federal Reserve to collect the checks, but rarely more
than two business days after they are received at the Reserve Banks,
even though they may not have been collected due to processing,
transportation, or other delays.
The reserve credit given for checks not yet collected is included in
Federal Reserve "float". On the books of the Federal Reserve
Banks, balance sheet float, or statement float as it is sometimes called,
is the difference between the asset account "items in process of
collection," and the liability account "deferred credit items." Statement
float is usually positive since it is more often the case that the reverse
credit is given before the checks are actually collected then the other
way around.
Published data on Federal Reserve float are based on a "reserves-factor" framework
rather than a balance sheet accounting framework. As published, Federal
Reserve float included statement float, as defined above, as well as
float related "as-of" adjustments. These adjustments represent
corrections for errors that arise in processing transactions related
to Federal Reserve priced services. As-of adjustments do not change the
balance sheets of either the Federal Reserve Banks or an individual bank.
Rather, they are corrections to the banks' reserve position, thereby
affection the calculation of whether or not the bank meets its reserve
requirements.
As Increase in Federal Reserve Float Increases Bank
Reserves
As
float rises, total bank reserves rise by the same amount.
For example, suppose Bank A receives checks totaling $100
drawn on Banks B, C, and D, all in distant cities. Bank
A increases the accounts of its depositors $100, and sends
the items to a Federal Reserve Bank for collection. Upon
receipt of the checks, the Reserve Bank increases its own
assert account "items in process of collections," and
increases its liability account "deferred credit items" (checks
and other items not yet credited to the sending banks'
reserve accounts). As long as two accounts move together,
there is no change in float or in total reserves from this
source. See illustration 21.
On the next business day (assuming Banks B, C, and D are one-day deferred
availability points), the Reserve Bank pays Bank A. The Reserve Bank's "deferred
credit items" account is reduced, and Bank A's reserve account is
increased $100. If these items actually take more than one business day
to collect so that "items in process of collection" are not
reduced that day, the credit to Bank A represents an addition to total
bank reserves since the reserve accounts of Banks B, C, and D will not
have been commensurely reduced. See illustration 22.
A Decline in Federal Reserve Float Reduces Bank Reserves
Only when the checks are actually collected from Banks B, C, and D does
the float involved in the above example disappear - "items in process
of collection" of the Reserve Bank decline as the reserve accounts
of Banks B, C, and D are reduced. See illustration 23.
On an annual average basis, Federal Reserve float declined dramatically
from 1979 through 1984, in part reflecting actions taken to implement
provisions of the Monetary Control Act that directed the Federal Reserve
to reduce and price float. (See chart). Since 1984, Federal Reserve float
has been fairly stable on an annual average basis, but often fluctuates
sharply over short periods. From the standpoint of the effect on bank
reserves, the volume changes in a difficult to-predict way.
Float
can increase unexpectedly, for example, if weather conditions
ground planes transporting checkpoints paying banks for
collection. However, such periods typically are followed
by ones where actual collections exceed new items being
received for collection. Thus, reserves gained from float
expansion usually are quite temporary.
"Federal Reserve float also arises from other funds transfer services provided
by the Fed, such as wire transfers, securities transfers, and automatic clearinghouse
transfers.
As-of
adjustments also are used as one means of pricing float, as discussed
on page 22, and for non float-related corrections, as discussed
on page 35.
If the checks received from Bank A had been erroneously assigned a two
day deferred availability, then neither statement float nor reserve would
increase, although both should. Bank A's reserve position and published
Federal Reserve float data are corrected for this and similar errors through
as-of adjustments.
Page
21
21.
When a bank receives deposits in the form of checks drawn
on other banks, it can send them to the Federal Reserve
Bank for collection. (Required reserves are not affected
immediately because requirements apply to net transaction
accounts, i.e., total transaction accounts minus both cash
items in process of collection and deposits due from domestic
depository institutions.)
22. If the reserve account of the payee bank is credited before the reserve
accounts of the paying banks are debited, total reserves increase.
23.But upon actual collection of the items, accounts of the paying banks
are charged, and total reserves decline.
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