Academic journal article ABA Banking Journal

Fed's Cash Fee Deadline Only Six Months Away

Academic journal article ABA Banking Journal

Fed's Cash Fee Deadline Only Six Months Away

Article excerpt

Banks with large currency handling volumes--shipping 1,000 bundles a week or more of $10 and $20 notes to the Federal Reserve--could be facing fees of $240,000 to $340,000 a year under revised Fed currency rules--even higher in some cases, according to an expert's estimate.

Last March, the Federal Reserve Board introduced "Federal Reserve Currency Recirculation Policy" [Docket No. 0P-1164]. The Fed revised its cash services policy "to reduce depository institutions' overuse of Federal Reserve Bank currency processing."

The new fees take effect July 1, end some sources believe few banks have taken steps to minimize the impact.

The Fed estimated that the rule change could directly affect 150-225 depository institutions with high-volume currency operations, although it believes that approximately 40 institutions with large currency businesses account for 90% of the problem. In particular the rules address a practice the Fed calls "cross-shipping," which refers to depositing currency at a Fed office and then withdrawing currency of the same denomination within the same week. The new policy only affects $10 and $20 denominations--the ones used most often in automated teller machines. (The entire program covered in this article relates to fit currency. Unfit bills will continue to be returned to the Fed as usual.)

The Fed already prohibited cross-shipping, but the new policy puts monetary teeth into the prohibition. As the Fed explained in issuing the change, banks traditionally recirculated currency among their various customers. The Fed's role was to supply new and fit currency, remove unfit currency, and act as intermediary between banks with surplus cash and those with a shortfall.

"Today," the Fed wrote, "depository institutions often order currency directly from Reserve Banks to stock ATMs and fill customer orders, depositing notes received from their customers directly with Reserve Banks." Because the Fed offers basic currency services without charge, it said, banks have an incentive to "economize on holdings of currency in their vaults" in excess of what is needed to satisfy reserve requirements. During 2004 deposits of 7.2 billion fit $10 and $20 notes were cross-shipped. …

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