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FEDERAL RESERVE B A « ©F M E W Y©RE€ [ Circular No. 983(0 1 April 4, 1985 J RECOVERY OF INTERTERRITORY CHECK FLOAT Elimination of Fractional Availability To All Depository Institutions, and Others Concerned, in the Second Federal Reserve District: Following is the text of a statement issued by the Board of Governors of the Federal Reserve System: The Federal Reserve Board has approved a proposal to eliminate the fractional availability credit ing option offered to depository institutions for the recovery of Federal Reserve interterritory check float. The Board’s action will become effective September 1, 1986. The Board took this action because experience with the fractional availability crediting option has indicated that the option would not provide for the full recovery of float from those institutions generating it. The Board also approved a continuation of the current moratorium on permitting additional deposi tory institutions to select this crediting option. Reserve Banks will continue to provide the fractions, on request, to depository institutions. Printed on the following pages is the text of the Board’s notice in this matter, which has been reprinted from the F e d e ra l R e g iste r of March 26. Although the discontinuance of the fractional availability option will not become effective until September 1, 1986, the Board’s current morato rium on permitting additional depository institutions to select the fractional availability option will continue in effect. Questions regarding this matter may be directed to James O. Aston, Vice Presi dent in charge of our Check Processing Function (Tel. No. 212-791-6334). E . G e r a l d C o r r ig a n , P resident. (OVER) Approximately 500 institutions currently are using the fixed availability F®d©iraS Reserve S®rvi©®@ option and 85 institutions currently are using the fractional availability option. AiSEMGYi Board of Governors of the These institutions are generally large Federal Reserve System. commercial banks, including ACTION: Termination of the fractional correspondents. The remaining 4,400 availability crediting option for institutions using Federal Reserve check interterritory check float recovery. services deposit checks directly with their local Reserve Banks and do not SUMMARY: The Board has approved the have the option of choosing between the proposal to discontinue the fractional fixed and fractional availability float availability crediting procedures as an recovery options. option for the recovery of Federal Experience with the fractional Reserve interterritory check float. availability credit option indicates that iFFietSWE DATE: September 1,1986.. it has the potential for not fully FORFURTHERINFORMATION©©MTACT: recovering the costs of float from the Elliott C. McEntee, Associate Director institutions generating this float because (200/452-2231), or William Brown, the fractions reflect historical, rather Manager (202/452-3760), Division of than current, collection experience. This Federal Reserve Bank Operations; means that in certain months the Daniel L. Rhoads, Attorney (202/452fractions must be less than actual 3711), Legal Division, Board of collection experience in order to recover Governors of the Federal Reserve float incurred in prior months. For System, Washington, D.C. 20551. example, collection experience for the month of May is generally very good SUPPLEMENTARYINFORMATION: because of favorable weather Background conditions. However, the fractions In February 1983 the Board approved applied to deposits during this month a program to reduce and price Federal will be lower than actual collection Reserve interterritory check float. 48 FR experience because they reflect ,10753 (March 14,1983). Under that collection experience for December program, depository institutions that through March. Accordingly, a send checks directly to the Federal depository institution may improve its Reserve office serving the paying funds availability and thus avoid paying institution were offered two credit for float previously incurred by using options to recover Federal Reserve alternate collection channels that reflect check float. With the first option, called actual collection experience during May. fixed availability, a depository An institution’s average dollar sendings institution is given 400 percent credit for to a’given point must remain relatively stable over time in order for float to be its check deposits. The amount of float fully recovered by fractional is later determined by actual collection performance and recovered through “as- availability. Accordingly, the cost of float will not be recovered from the of ’ adjustments, clearing balance institutions generating and benefiting earnings credits, or explicit charges to from the float if the institution changes the institution’s account.iinder the its collection patterns over time. second option, called fractional The Board published for public availability, a depositing institution comment in July 1984 a proposal to receives partial credit for each deposit, eliminate the fractional availability that is, a fraction of each deposit is credit option. 49 FR 29461 (July 20,1984). deferred an additional day. Under this The Board also placed a moratorium on option, a separate fraction for each permitting additional institutions to receiving Federal Reserve office is select the fractional program pending applied to all institutions that use the Federal Reserve transportation network final Board action. to send checks directly to that Reserve D iscussion office. Another set of fractions are The Board received 26 comments in computed when institutions use their response to its proposal to eliminate the own transportation to send deposits to fractional availability credit option. other Federal Reserve offices. In all Seven of these commenters currently cases,.the fractions are based on the use the fractional availability credit average collection experience over, the option. Thirteen commenters favored the prior four month period. Consequently, elimination of fractional availability the fractional availability credit option while 13 commenters preferred its results in an over or underrecovery at retention. Of those in favor, three any given period that in theory should commenters stated that their support of be offset by under or overrecoveries at the proposal to eliminate fractional other times. [Dostefi No. R-0525] 2 availability w as conditioned on the F ederal Reserve changing the w ay it recovers float from depository institutions th at deposit their checks directly w ith their local Federal Reserve office. T h f §e supporting the proposal regarded the elim ination of the fractional option as appropriate in light of the Federal R eserve’s concern w ith the potential for the underrecovery of float from the depository institutions generating an d benefiting from the float. T hese com m enters believed that elim inating the fractional option would rem ove the potential subsidization of depositors using the fractional availability option by the rem aining Federal Reserve depositors. The concern w as ex p ressed th at some-of the institutions using fractional availability on a selective b asis m anaged the option to their ow n advantage, but to the d isadvantage of the industry a t large. Institutions opposing the elim ination of fractional availability stated th at this option provides institutions w ith predictability w ith regard to credit availability, a m ethod for evaluating F ederal Reserve check clearing perform ance. Several of these institutions also indicated th at significant programming costs w ere incurred in order to p articipate in the fractional availability program and that they w ould incur additional programming costs if the this option w ere elim inated. Com ments w as also requested on w hether the fractional availability option could be m odified to preserve its benefits w hile elim inating its potential to result in underrecovery of float from those institutions using it. Some com m enters suggested modifying fractional availability to estab lish a periodic settlem ent period, at w hich time the cost of the underrecovered float w ould be charged directly to the institution th at generated the float and w ould benefit frorifpits underrecovery. H ow ever, if the fractional option w ere m odified in this m anner, institutions w ould not know in advance w h at their total float costs w ould be until the settlem ent period, thus losing the benefit of predictability. Further, this m odification w ould m ake the fractional option very sim ilar to the fixed availability option; if fractional availability w ere m odified to incorporate a regular settlem ent period, there w ould be no difference betw een the fractional an d fixed availability o p tions except for the timing of the settlem ent period. In addition, the R eserve Banks have indicated th a t they would incur significant one time implementation and ongoing costs if fractional availability wer® modified in this manner. Since this proposed modification would not retain the desired benefits of fractional availability and would increase costs, the Board believes that this modification should not be adopted. Another modification suggested by the commenter8 was to change the method of calculating the fractions. Gommenters suggested that instead of suing a four month moving average for computing the applicable fraction, Reserve Banks use a monthly fraction based on the most recent month’s collection experience or use a fraction that takes into account seasonal collection performance. Use of a one or two month moving average would, however, introduce further volatility into the fractions and would thus increase the incentives for institutions to use other collection channels when the fractions were low relative to actual collection experience. Further, it is not possible to establish fractions that will in most cases equal actual collection experience, regardless of the method of calculating the fractions. It will always be necessary to establish fractions in certain periods below actual collection experience to take account of previously unrecovered float. Accordingly, the Board believes it is not possible to eliminate the potential for float underrecovery from the institutions generating the float through modification of the methodology for calculating the fractions. In view of the inability to modify factional availability to preserve its benefits and eliminate the potential for underrecovery of float, the Board believes that the fractional availability option should be eliminated. The elimination of fractional availability will ensure that float is recovered from the institutions that benefited from the float, rather than from all depositors through per-item fees. Moreover, given the relatively few institutions that use fractional availability (85 of the approximately 600 that sent checks to the Reserve Bank office serving the paying institutions) and the numerous other adjustments that occur in Reserve and clearing accounts, elimination of the fractional option would not, as suggested by a few commenters, unduly complicate an institution’s management of its reserve position. The Board has approved the following steps to reduce the impact that elimination of the fractional availability option may have on depository institutions using the option. First, the Reserve Banks will continue, if requested, to provide fractions to depository institutions to enable them to continue using the fractions to allocate float to their customers. Provison of these fractions will also enable institutions to evaluate Reserve Bank check collection performance. Second, depository institutions currently using the fractional availability option will confine to be allowed to use the option until September 1,1986. The delayed implementation date will provide institutions with sufficient lead time to make any necessary modification to their computer systems. Six commenters indicated that if the fractional availability option is eliminated, the Federal Reserve should not allow depositors depositing checks with their local Federal Reserve office for collection to. use the fractional availability option. The Federal Reserve currently sorts such checks by endpoint and provides the depositing institutions availability based upon the anticipated collection of the checks. While the Federal Reserve provides a form of fractional availability to recover float from these depositors, it is administered differently and does not provide the benefits of the fractional availability option that is the subject of this action. Because the institutions depositing checks with their local Federal Reserve office are typically small institutions that do not sort their cheeks before depositing them with the Federal Reserve, they generally do not know the mix of checks they have deposited. Accordingly, unlike the fractional availability option, the depository institution typically does not know with certainty in advance the availability it will receive from the Federal Reserve. Moveover, Mis unlikely that this procedure will result in an underrecovery of float from the institutions that benefit from the float because such institutions, given their smaller size, generally do not shift their collection patterns in response to short term changes in availability. Finally, it simply is not operationally feasible to extend fixed availability to depository institutions depositing checks with their local Federal Reserve office. When an institution deposits its checks with its local Federal Reserve office, the checks are sorted by receiving Federal Reserve office and commingled with items from other depositors destined for that same Reserve office. Unlike the checks deposited by 3 institutions that send cheeks directly to other Federal Reserve offices, the float associated with the deposits made by the individual depositor depositing checks with its local Federal Reserve office cannot be determined. For these reasons, the Board does not believe that it is appropriate to change the manner in which float is recovered from institutions depositing checks with their local Federal Reserve office. In view of the inability to modify the fractional availability credit option to preserve its benefits and eliminate the potential for underrecovery of float, the Board has determined to discontinue this crediting option effective September 1,1986. The Board has also decided to continue the moratorium on permitting additional depository institutions to select the fractional availability option. To reduce the impact of its decision to eliminate the fractional availability option, the Board has instructed Reserve Banks to continue providing the fractions, on request. The Board has also approved several modifications to the procedures for accounting for Federal Reserve check float. Three of the commenters responding to the proposal to eliminate the fractional availability credit option commented that the remaining fixed availability crediting procedures do not take into consideration the effect of float recovery on required reserves, resulting in overcharging for float. Depository institutions are permitted to deduct the amount of their cash items in the process of collection (“CIPC”) from the amount of gross transaction accounts in computing required reserves. 12 CFR 2(M.3(f)(l). When a depository institution deposits a check with the Federal Reserve for collection, the amount of the check is Included In the institution’s gross transaction accounts subject to reserve requirements, and is offset by a corresponding CIPC deduction. The CIPC deduction is provided in recognition of the fact that the depository institution has not yet been given credit by the Federal Reserve for the check. When credit for the check is given, the institution loses the CIPC deduction and its reserve requirements increase. If credit is given before the check is collected by the Federal Reserve, float is generated. When the institution is later charged by the Federal Reserve for the float, no adjustment is made for the cost of the increased reserve requirement, with the result that the float charge exceeds the benefit to the institution of the float In response to the concerns expressed by depository institutions, the Board has determined to modify the System’s accounting procedures to take into account the effect of float on the reserve requirements to which Reserve Banks would be subject if they were required to hold reserves. Net check float will be deducted from the amount of clearing balances maintained with the Federal Reserve before the imputed required reserves are determined. This procedure will result in the Federal Reserve accounting for float in a manner conforming more closely to the accounting practices of correspondent banks. The effect of this modification will be to reduce the Reserve Bank’s imputed reserve requirement and increase their earning assets.1 The interest on these additional earning assets will then offset part of the cost of float that is to be charged back to depository institutions. The Board wishes to emphasize that the Federal Reserve’s accounting procedures as modified will continue to recognize as a cost to the Federal Reserve the full value of float at the federal funds rates, as required by the MCA. The accounting change approved by the Board will reduce explicit float charges to direct and consolidated sending institutions by 12 percent. Further, the float component of per-item 4 fees will also be lowered by 12 percent. The modifications are expected to have a minimal impact on the Federal Reserve’s per-item fees since the float component of the base used to calculate per-item fees is less than 3 percent of the total. A 12 percent reduction in this component will reduct the total to be recovered by only 0.25 percent. Federal Reserve income statements will be amended to reflect these accounting changes. By order of the Board of Governors of the Federal Reserve System, March 20,1985. WilliamW. Wiles, Secretary of the Board. [FR Doc. 85-7052 Filed 3-25-85; 8:45 am] BILLING CODE S21O-01-M
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