Fed Announces Changes to Cash Services
Providing cash to financial institutions has long been an important service provided by the Federal Reserve Banks, and recirculating currency between the Fed and banks keeps cash flowing even in times of national emergencies, such as Sept. 11, 2001, and last year’s hurricane season.
Providing cash efficiently to meet the cyclical demands of financial institutions is a fluid process, and on March 17 the Fed’s Board of Governors revised its cash services policy to streamline the process and reduce related expenses.
New program seeks greater efficiency
One component of this revision is the launch of the Custodial Inventory program, which provides depository institutions with an incentive to increase currency recirculation. Federal Reserve Financial Services began accepting applications to participate in the Custodial Inventory program on May 15, 2006.
Under this program, which will begin operation in July 2006, a bank can transfer currency in its vault to the Federal Reserve Bank’s books but retain physical control of the currency in its secured facility. This practice allows participating institutions to reduce the size and frequency of their deposits of currency into and orders from Reserve Banks. Participating institutions that deposit fit $10 or $20 notes at a Reserve Bank and order the same denomination, above a certain amount, during the same business week will be assessed a fee.
The program’s benefits include reduced use of central bank services, encouragement of best practices procedure for currency recirculation at the depository institution, and reduction of the societal cost of providing fit currency.
Rollout targets high-volume institutions
The Custodial Inventory program applies only to $10 and $20 notes, and to qualify for participation, a depository institution must demonstrate that it recirculates a minimum of 200 bundles of $10 and $20 notes per week in a Federal Reserve Bank zone or subzone. Reserve Banks estimate that the changes to the cash services policy could affect around 150–225 depository institutions with high-volume operations.