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Board of Governors Proposes Changes to Cash Recirculation Policy

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Board of Governors Proposes Changes to Cash Recirculation Policy

On Oct. 8, 2003, the Federal Reserve Board of Governors requested public comment on a proposal to change its cash services policy. The public comment period, which ended Jan. 15, 2004, generated 23 comments.

The proposed changes are designed to reduce the overuse of free Federal Reserve cash processing services. The Board wishes to add two elements to the policy:

1. a custodial inventory program that would provide an incentive to depository institutions to hold currency in their vaults to meet their customers’ demands, and

2. a fee that would be charged to institutions that deposit currency to and order currency from Reserve Banks within the same week, instead of recirculating deposited currency among their customers.

The Board proposes to implement the recirculation policy in phases. In early 2004, the Reserve Banks will accept applications for a custodial inventory proof-of-concept program. The Board will evaluate the results of the program after about six months of operation and will decide whether to implement a permanent custodial inventory program in 2005.

Reserve Banks would begin assessing the recirculation fee in 2006. Based on current behavior, approximately 100 depository institutions, out of 8,000, may incur fees under this proposed policy.

The proposed policy only applies to deposits of fit $5s, $10s and $20s that are followed or preceded by an order of the same denomination within the same calendar week.

In 2007, the Board would extend the recirculation policy to $1 notes if the Reserve Banks are unable, by working collaboratively with depository institutions, to achieve significant savings.

More information can be found online by visiting www.frbservices.org. First select “Products and Services” from the left-hand menu bar, then select “Cash Services.”

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