Modern Money Mechanics 4
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Changes in U.S. Treasury
Deposits in Federal Reserve Banks
Reserve accounts of depository institutions constitute the bulk of the deposit liabilities of the Federal Reserve System. Other institutions, however, also maintain balances in the Federal Reserve Banks - mainly the U.S. Treasury, foreign central banks, and international financial institutions. In general, when these balances rise, bank reserves fall, and vice versa. This occurs because the funds used by these agencies to build up their deposits in the Reserve Banks ultimately come from deposits in banks. Conversely, recipients of payments from these agencies normally deposit the funds in banks. Through the collection process these banks receive credit to their reserve accounts.
The most important nonbank depositor is the U.S. Treasury. Part of the Treasury's operating cash balance is kept in the Federal Reserve Banks; the rest is held in depository institutions all over the country, in so-called "Treasury tax and loan" (TT&L) note accounts. (See chart.) Disbursements by the Treasury, however, are made against its balances at the Federal Reserve. Thus, transfers from banks to Federal Reserve Banks are made through regularly scheduled "calls" on TT&L balances to assure that sufficient funds are available to cover Treasury checks as they are presented for payment. (8) Bank Reserves Decline as the Treasury's Deposits at the Reserve Banks Increase Calls on TT&L note accounts drain reserves from the banks by the full amount of the transfer as funds move from the TT&L balances (via charges to bank reserve accounts) to Treasury balances at the Reserve Banks. Because reserves are not required against TT&L note accounts, these transfers do not reduce required reserves.(9) Suppose a Treasury call payable by Bank A amounts to $1,000. The Federal Reserve Banks are authorized to transfer the amount of the Treasury call from Bank A's reserve account at the Federal Reserve to the account of the U.S. Treasury at the Federal Reserve. As a result of the transfer, both reserves and TT&L note balances of the bank are reduced. On the books of the Reserve Bank, bank reserves decline and Treasury deposits rise. See illustration 19. This withdrawal of Treasury funds will cause a reserve deficiency of $1,000 since no reserves are released by the decline in TT&L note accounts at depository institutions. Bank Reserves Rise as the Treasury's Deposits at the Reserve Banks Decline As the Treasury makes expenditures, checks drawn on its balances in the Reserve Banks are paid to the public, and these funds find their way back to banks in the form of deposits. The banks receive reserve credit equal to the full amount of these deposits although the corresponding increase in their required reserves is only 10 percent of this amount. Suppose a government employee deposits a $1,000 expense check in Bank A. The bank sends the check to its Federal Reserve Bank for collection. The Reserve Bank then credits Bank A's reserve account and charges the Treasury's account. As a result, the bank gains both reserves and deposits. While there is no change in the assets or total liabilities of the Reserve Banks, the funds drawn away from the Treasury's balances have been shifted to bank reserve accounts. See illustration 20. One of the objectives of the TT&L note program, which requires depository institutions that want to hold Treasury funds for more than one day to pay interest on them, is to allow the Treasury to hold its balance at the Reserve Banks to the minimum consistent with current payment needs. By maintaining a fairly constant balance, large drains from or additions to bank reserves from wide swings in the Treasury's balance that would require extensive offsetting open market operations can be avoided. Nevertheless, there are still periods when these fluctuations have large reserve effects. In 1991, for example, week-to-week changes in Treasury deposits at the Reserve Banks averaged only $56 million, but ranged from -$4.15 billion to +$8.57 billion. 8When the Treasury's balance at the Federal Reserve rises above expected payment needs, the Treasury may place the excess funds in TT&L note accounts through a "direct investment." The accounting entries are the same, but of opposite signs, as those shown when funds are transferred from TT&L note accounts to Treasury deposits at the Fed. back 9Tax payments received by institutions designated as Federal tax depositories initially are credited to reservable demand deposits due to the U.S. government. Because such tax payments typically come from reservable transaction accounts, required reserves are not materially affected on this day. On the next business day, however, when these funds are placed either in a nonreservable note account or remitted to the Federal Reserve for credit to the Treasury's balance at the Fed, required reserves decline. back 19 When the Treasury builds up its deposits at the Federal Reserve through "calls" on TT&L note balances, reserve accounts are reduced. back
20 Checks written on the Treasury's account at the Federal Reserve Bank are deposited in banks. As these are collected, banks receive credit to their reserve accounts at the Federal Reserve Banks. back
End of page 19. forward 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 on 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 yet 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."(10) 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 reserve credit is given before the checks are actually collected than 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 includes statement float, as defined above, as well as float-related "as-of" adjustments.(11) 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 bank's reserve position, thereby affecting the calculation of whether or not the bank meets its reserve requirements. An 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 asset account "items in process of collection," and increases its liability account "deferred credit items" (checks and other items not yet credited to the sending bank's reserve accounts). As long as these 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 commensurately reduced.(12) 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 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 significant aspect of float is not that it exists but that its volume changes in a difficult-to-predict way. Float can increase unexpectedly, for example, if weather conditions ground planes transporting checks to 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. 10Federal Reserve float also arises from other funds transfer services provided by the Fed, and automatic clearinghouse transfers. back 11As-of adjustments also are used as one means of pricing float, as discussed on page 22, and for nonfloat related corrections, as discussed on page 35. back 12If the checks received from Bank A had been erroneously assigned a two-day deferred availability, then neither statement float nor reserves 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. back 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.) back
22 If the reserve account of the payee bank is credited before the reserve accounts of the paying banks are debited, total reserves increase. back
23 But upon actual collection of the items, accounts of the paying banks are charged, and total reserves decline. back
Modern Money Mechanics
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