Check Clearing and Float
Businesses and individuals deposit millions of checks at banks every day. When a bank receives a check for deposit, it provisionally credits the account of the check depositor and later collects the funds from the bank upon which the check is drawn. Rather than sort all the checks and send each one back to the bank it was drawn upon for settlement, depository institutions transfer many of their checks to Federal Reserve Banks for collection. In turn, Reserve Banks pay the depositing banks for the total amount of the checks, and then collect the funds from the banks on which the checks are drawn. The Federal Reserve processes about one-third of all checks in the United States.
As standard procedure, when a Reserve Bank receives checks from a bank, it credits that institution's reserve account for the amount of the checks according to a prearranged funds "availability schedule." A Reserve Bank gives credit for most checks the same or the next business day, and within two days for almost all others. However, the bank on which the check is drawn does not pay the Reserve Bank until the check is presented to it.
Float is created when a Reserve Bank credits a bank for depositing a check but has not yet collected funds from the bank upon which the check is drawn. Both banks now list the funds on their books, and they continue to do so until the check is presented and the Reserve Bank collects funds from the bank on which the check is drawn. As a result, both banks have use of the same funds for a short time.
Float and Monetary Policy
Main Causes of Float
Reducing Float in the 1970s and 1980s.
The Federal Reserve took action in 1973 to reduce transportation float by establishing new regional check-processing facilities throughout the Federal Reserve System. In addition, efficiency in the use of air charter service was improved. These measures helped reduce float from a daily average of $2.7 billion in 1973 to a daily average of $2.1 billion in 1975. However, between 1975 and 1979, float more than tripled (in nominal terms) to a daily average of $6.6 billion, an all-time high. The Board of Governors of the Federal Reserve System believed that transportation float caused by remote disbursement had become a serious problem, and issued a policy statement in early 1979 to discourage the practice.
As part of the Monetary Control Act of 1980s, the Federal Reserve System was instructed to charge banks for float. As a result of this legislation and greatly improved check processing efficiency, float was reduced to a daily average of $2.5 billion in 1982, down about 60 percent (in nominal terms) from the 1979 level. To reduce float further, the Federal Reserve implemented procedural changes in the 1980s. Among these changes was the establishment of a nationwide noon-presentment policy in 1983 that allowed later delivery of checks to banks in cities with Federal Reserve check-processing offices. This policy also applied to high-volume institutions in more remote areas that had access to regional check processing centers. These actions significantly increased the number of checks that could be collected overnight, speeding the clearing process and reducing float. By 1985, float was reduced to a daily average of $820 million, down almost 90 percent from its 1979 level. The amount of float averaged $860 million through the rest of the 1980s.
Developments in the 1990s
Also, the Federal Reserve has been installing new technology since the 1980s to reduce transportation float. Instead of having their accounts debited upon the physical return of checks, paying banks have the option of having their checks scanned and converted into electronic presentments at the Federal Reserve. The electronic presentments are transmitted from the Federal Reserve to the paying banks, and accounts are debited more quickly. The Federal Reserve is continuing to investigate and implement new methods to speed the check-clearing process. As a result, float averaged only $774 million in 2000, and it will likely decrease even further as technology advances.