During the past several years, the Fed has experienced a significant rise in currency-related activity. Some banks may be using sweep retail accounts to lower their reserve requirements and thereby reduce currency on hand (i.e., vault cash), while other banks simply have gained a better understanding of currency inventory demands after Y2K.
The Fed's role in distributing currency is to circulate a supply that will sufficiently meet the public's needs, ensure currency quality levels and maintain public confidence in U.S. currency. However, banks' increasing reliance on the Fed's currency services has expanded our role beyond what originally was envisioned in our charter.
When comparing the most recent seven-year currency receipt and payout results (1995-2001), our District recorded a 47 percent increase in currency payout activity and a 31 percent increase in receipt activity. Upon looking at the initial data, it appears this growth is due to a decline in currency recirculation by commercial banks. This results in a considerable duplication of efforts between the Fed and the private sector, largely at public expense.
The Fed will accept an institution's surplus deposits and provide this currency to institutions that have a shortfall. We expect banks, however, to act as intermediaries among their customers—for example, using a commercial customer's deposit to meet the cash demands of walk-in branch or ATM customers. This promotes payments system efficiency because it allows supply and demand to be met with a minimal duplication of efforts.
When banks do not recirculate currency, but rather, deposit and reorder currency through the Fed, the Fed duplicates all of the banks' processing. Although the Fed provides these services to customers free of charge, real costs are incurred when the Fed must re-verify, recount and re-strap deposits that could have been paid directly to a bank's customers.
What can be done to minimize this growing trend? I believe we need to foster greater currency recirculation within the private sector. By working with our depository institutions, we can realize a more efficient currency-handling environment jointly.
Currently, the System is formulating a policy to address this issue. Our target date for the public comment period is year-end.
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Fed in Print: An index of the economic research conducted by the Fed.