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March 11, 1983

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Delayed Availability
Much controversy has been generated in
legislative circles over bank and thrift policies of delaying withdrawal rights or interest
credit on check deposits. In many cases,the
institutions require that the deposit not be
withdrawn for ten to fifteen business days (or
longer) and in some cases interest is foregone over this period. The new interestbearing money-market deposit accounts
(M M DA's) and ceiling-free checking
accounts (Super-N OW's) have brought the
issue to the forefront.
Consumers commonly believe that delayed
withdrawal rights and foregone interest (i.e.,
delayed accrual) have no logical basis other
than as a means by which institutions somehow exploit their customers. This thesis is
hard to defend, however, because these
institutions compete with one another for
deposits, and persistent exploitation would
only result in a loss of business to more
aggressive institutions.
In this Letter, we explain these bank and
thrift policies in terms of the economic and
technological constraints on clearing
checks. Even in competitive markets, banks
and thrifts might delay interest accrual for
two or more business days beyond the date
of deposit and require that funds not be
withdrawn for ten to fifteen business days (or
more). In fact, immediate interest and withdrawal rights normally would impose a cost
on the institution that it somehow would
have to recoup through a lower rate of
interest or higher charges associated with
the account.

funds, the bank must clear the check in some
combination of three possible avenues:
directly with the other bank, through a
correspondent bank Or banks, or through the
Federal Reserve System.
In the case of direct collection against a local
bank, the collecting bank often receives investable funds in only one day. But "direct
sends" to distant banks normally are too
slow and costly to be practical. For distant
banks, clearing may occur through a network of correspondent banks (i.e., banks
that sell check-clearing services to other
banks) and/or the Federal ReserveSystem.
For example, the collecting bank may send
the check to its local correspondent bank,
which sends the check to the Federal
Reserve for clearing. This process might
take one to three or more days depending on
the location of the collecting and ultimate
payor banks.
Because of the time required to process
paper checks, a bank does not receive compensation until one to three, or possibly
more, days after the date of deposit. For this
reason the bank may choose to delay
accrual of interest on the deposit for a comparable period of time. However, as part of
its checking account service policy, the
bank may grant interest (and withdrawal
rights) overnight, especially if the deposit is
small and the account is longstanding. Such
practice is commonplace, and amounts to a
customer-initiated loan from the bank to the
depositor.

Delayedwithdrawal of funds
Delayedinterest
A bank may delay interest payments on
deposits made by check for several days
because it normally takes that long for the
bank to clear the check and receive investable funds. When a bank accepts a check for
deposit, it credits the depositor'S account
that night. However, to receive investable

Throughout the clearing process, all interbank payments are "provisional," that is,
conditional on the check ultimately being
"good." Thus, the mere fact that the check
clears in perhaps three days does not necessarily end the process: a check may be
"bad." A check must be returned if it is
incorrectly written, a forgery, written against

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Opinions

in this newslel'! E'r do not
necessarily reflect thE:'vieNs of the-management
of the Federa! Reserve Bank of San ·Francisco.
or of the Board of Covernors of thp Federal
Reserve

insufficient funds, or somehow mutilated
in the check-clearing process. I f such a
problem is discovered, which may occur
after the check clears the interbank channels, the process must subsequently be
"unwound." The check is returned, the
interbank payment is reversed through the
same channels, and the depositor's bank has
its funds revoked. At present, this process
can easily take ten to fifteen business days.

and when they can withdraw the funds. The
customer to whom the terms are unsatisfactory can seek another bank (or thrift)
that offers preferable terms, or can inquire
about ways of depositing funds otherthan by
paper check.
Some consumer groups have charged that
banks enjoy fifteen days of "float" when
withdrawal rights are delayed for that long,
even though the bank may begin paying
interest at market rates immediately. This
interpretation of float is incorrect. "Bank
float" arises because of a mismatch between
the time at which a check is posted to a
customer's account and the time at which
the collecting bank or its correspondent
receives investable funds through the clearing process. Float has a specifi Cconnotatloii'
that is not necessari Iy tied to withdrawal
rights.

In the check-clearing process, therefore,
only the passage of time beyond some norm
for returned checks tells the collecting bank
that a check is probably "good." If the bank
allows the depositor to withdraw the funds
(I.e., grants availability) soon after the date
of deposit, the bank itself is at risk. Thus,
delayed withdrawal protects the bank from
the credit risk associated with checks.
Again, as part of its normal checking
account services, the bank may grant immediate funds availability, and this practice
is commonplace for small checks and longstanding accounts.

Although the concept of bank float is widely
accepted, it has little economic relevance
to today's interest-bearing checking accounts. The key dimension in determining
an economic value associated with "float"
is the time difference between when a depositor has access to the valued attributes of
the account and when the bank receives
investable funds. I f deposits pay no explicit
interest (e.g., traditional demand deposits),
then withdrawal rights are the key attribute
because the account is valued largely for
funds availability. In this case, an economic
value associated with "float" would be
marked by the time difference between
when the bank grants withdrawal rights and
when it receives investable funds.

Interestvs.withdrawal
Payment of interest and allowing withdrawal of funds each has economic value
both to the depositor and the bank. Interest
payments (or comparable in-kind services)
are an explicit transfer of wealth, while
assumption of credit risks is an implicit
transfer of wealth. In assessing the terms of a
deposit, the two issues of interest accrual
and withdrawal of funds can be separated.
When making deposits, consumers should
ask when they will begin earning interest

But if deposits pay market rates (e.g., the
new M M D A's), the date of interest accrual
marks commencement of the depositor's
access to the account's economic value
because the account is valued primarily for
its interest payments. If the bank grants
overnight interest accrual at market rates but
does not receive investable interbank funds
for three days, three days of economic return
have been granted the depositor despite
2

interbank acknowledgment of a check's
being returned.

when the account was posted or withdrawal
rights were made available. For interestbearing accounts, the accepted concept of
"float" has little economic relevance.

At face value, all of these proposals have
merit. But the legislative/regulatory approach seemsunnecessarily cumbersome or
possibly perverse as a solution to delayed
interest and availability. For example, it is
possible that creating legislative/regulatory
standards for interest accrual might actually
work against many consumers because
banks and thrifts might delay interest credits
even On small deposits for which they now
typically grant overnight interest. Moreover,
does the consumer wish to be barraged with
information regarding delayed interest,
delayed withdrawal, and access to the wire
on every deposit?

Electronic payments
Deferred interest and availability arise from
the fact that funds transfers and supporting
information flows are slow in a paper-check
payments system. While this system presently is economic for small-dollar payments,
both the funds and confirmations need to
move faster for large-dollar payments.
For payments that are readily automated,
such as recurring social security and salary
payments, computerized transfers through
the automated clearinghouse (ACH) essentially eliminate the problem of slow paper
checks. For large-dollar payments the
"wire" provides an alternative to paper
checks. The depositor can request the paying bank to "wire" funds to the collecting
bank, thereby eliminating the paper check.
Electronic notification is sent from the paying to the collecting bank and interbank
funds are transferred that day. The collecting
bank receives "good" (investable and irrevocable) funds immediately. Moreover,
given the legal nature of wire transfers, the
collecting bank faces almost no credit risk.
Consequently, the norm is for banks to grant
depositors overnight interest and immediate
availability On such deposits.

Although legislative and regulatory developments may be a partial solution to the
problem, competition among institutions to
provide more attractive services, including
faster interest and withdrawal credits, is the
solution that the marketplace already provides. Competition for deposits will force
banks and thrifts to offer attractive combinations of interest accrual policies, withdrawal
rights, and yields. But since all three attributes impose a cost on the institution,
depositors shou Id expect more favorable
terms in one area to be traded off against less
favorable terms elsewhere. For this reason,
the shift to deregulate market yields on
accounts has resulted in somewhat tighter
policies on overnight interest and funds
availabil ity.
Jack Beebe and Tom Klitgaard

legislative debate
Delayed credit has been debated in Federal
and state legislative circles and several
'
possible legislative avenues have been considered. Proposals have been put forth to
require that institutions inform depositors as
to delayed interest accrual and withdrawal
on check deposits and of the option of wire
transfers. Another direction would require
that institutions not delay interest accrual
beyond the time that it takes for the bank to
collect the funds. Still another direction
would require further standardization of
interbank check processing and expedited
3

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§g
BANKINGDATA-TWELFTHFEDERAL
RESERVE
DISTRICT
(Dollar amounts in millions)

selected
Assetsaffll
Liabilities
largeCommercial
Banks
Loans(gross,
adjusted)andinvestments*
loans(gross,adjusted)- total#
Commercialandindustrial
Realestate
Loansto individuals
Securities
loans
U.s. Treasurysecurities*

Othersecurities*
Demanddeposits- total#
Demanddeposits- adjusted
Savings
dep:>sits
- total
Timedeposits- totaJ#
IndiViduals,part. & corp.
(largenegotiable CD's)

WeeklyAverages
of DailyFinures
Member Bank ReservePosition
ExcessReserves(+ )/Deficiency (-)
BorrOWings
Net free reserves(+ )/Net borrowed(-)

Amount
Outstanding
2/23/83

163,045
141,657
44,927
57,368
23,586
2,250
7,602
13,786
39,449
26,291
62,826
71,518
63,186
23,728

Change
from
2/16/83
- 296
- 419
- 83
49
- 85
- 115
32
92
- 593
-1,128
656
- 963
- 851
- 535

Change from

yearago
Dollar

Weekended

Weekended

2/23/83

2/16/83

20'
3
17

Percent

4,640
4,704
2,668
664
265
148
1,263
1,326
1,817
222
32,639
- 20,933
- 19,460
- 12,52'0

95
73
22

2.9
3.4
6.3
1.2
1.1
- 6.2
19.9
8.8
4.8
0.9
108.1
- 22.6
- 23.5
- 34.5
Comparable
vearMauo
oeriod
73
155
82

Excludestrading account securities.
# Includes items not shown separately.
Editorial comments may beaddressedto theeditor(GregoryTong)orto theauthor.... Freecopiesof this and
other Federal Reservepublications can beobtained by calling or writing the Public Information Section,
FederalReserveBank of SanFrancisco,P.O. Box 7702, SanFrancisco94120. Phone (415) 974·2246.
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