Do Banks Hold More Vault Cash Than They Need?

Donald S. Allen

Depository institutions are allowed to use vault cash, in addition to funds held on deposit with the Federal Reserve, to satisfy statutory reserve requirements. In 1992, statutory reserve requirements were reduced. Then, in 1995, banks expanded sweeps, or reclassifications, of customers' cash reserves into savings accounts not subject to reserve requirements. Because of these reductions in required reserves, the percentage of reserves covered by vault cash has increased steadily.

In the Eighth Federal Reserve District, this percentage increased from 54 percent in 1993 to 75 percent in 1996. The number of small banks whose required reserves are completely satisfied by vault cash increased from 73 percent in 1993 to 80 percent in 1996; for medium banks the number rose from 26 percent in 1993 to 49 percent in 1996; and for large banks, from none in 1993 to 28 percent in 1996. The chart shows the downward trend in total required reserves for the Eighth District and the upward trend in total vault cash held by banks through the end of 1996.

Vault cash that is used to satisfy required reserves is not available for lending. So even if vault cash is more than necessary to meet daily demand, the foregone earnings may be small.[1] The quantity of "surplus" vault cash (i.e., above that used to meet reserve requirements) also has increased steadily, however. This currency is an idle asset. If banks determine that the potential value of this surplus vault currency exceeds the cost of tighter cash management, they may take steps to reduce the surplus. Indeed, recent developments in 1997 suggest that some banks are becoming more concerned and are considering using consultants to manage vault cash balances more efficiently.

Discussions with some St. Louis banks have revealed that prior to reclassification of customer accounts, the primary concern regarding vault cash was to limit the amount for security reasons. Now that these banks have reduced their reserve requirements significantly, they plan to investigate ways to economize on vault currency.

Some of the factors banks must consider in deciding to implement optimum vault cash management programs include the foregone interest from surplus vault currency, the cost of running out of currency (in ATMs, for example), and the cost of more frequent shipments of currency. The direction of future policies regarding payment of interest on required reserves and commercial customer accounts, and currency access (such as the Fed's new Uniform Cash Access Policy, limiting the number of free weekly deliveries of currency from the Fed) also must be considered.

The degree to which banks implement these optimum cash management programs is of interest to the Fed because it affects cash operations and monetary policy. In a transition period, there may be a net inflow of currency to the Federal Reserve Banks, while measurement of monetary aggregates may become noisier.



  1. Required reserves do not earn interest, but banks can earn credits on reserves on deposit with the Fed that may be used to offset fees for Fed services. In addition, banks that maintain clearing balances at the Fed have an incentive to keep more required reserves as deposits to help avoid overdrafts. These benefits may not be enough to persuade banks to hold reserves at the Fed instead of the vault.[back to text]

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