Recirculation Policy Seeks To Reduce Overuse of Bank's Vault Services

The Fed's Board of Governors announced March 17 the Currency Recirculation Policy, which will institute a fee in July 2007 to depository institutions (DIs) that "cross-ship" currency over a certain minimal amount. Cross-shipping refers to the deposit and withdrawal of currency considered fit for circulation in the same week with a Federal Reserve bank, which often causes a lot of inefficiencies in the payments system.

The policy is intended to reduce the overuse of Reserve banks' vault services. A combination of DIs working to reduce the currency in their own vaults, and an increase in third-party ATM stocking, has caused an overall increase in the size and frequency of transactions into and out of deposit and order transactions. The policy also will reduce unneeded costs associated with this activity without affecting the quality of currency in circulation.

The recirculation policy will affect only those DIs that cross-ship large amounts of the $10 and $20 denominations. To aid in recirculation of fit currency, those DIs that cross-ship currency may apply to hold a custodial inventory in their vault and record it on the Federal Reserve's books. Those funds will be available to be recirculated to other banks needing fit currency. (The Fed began accepting custodial inventory applications in May.) For more information, see www.frbservices.org/operations/currency/currency_recirculation_policy.html.

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