Abstract

The payment process consists of clearing—the transfer of payment instructions—and settlement—the transfer of value associated with a payment. When the value being transferred takes the form of deposit money in banks, the performance of back-office accounting becomes an important part of the payment process and is a crucial factor determining who has the benefit of the value being transferred at any instant in time. In an ideal payment system, processing and related accounting should result in the payor’s account being debited and the payee’s account being credited at the same time.

The payment process consists of clearing—the transfer of payment instructions—and settlement—the transfer of value associated with a payment. When the value being transferred takes the form of deposit money in banks, the performance of back-office accounting becomes an important part of the payment process and is a crucial factor determining who has the benefit of the value being transferred at any instant in time. In an ideal payment system, processing and related accounting should result in the payor’s account being debited and the payee’s account being credited at the same time.

When accounting for payments is not synchronized with the clearing of payment instructions, arbitrary costs are imposed on some payment system users and windfall gains are conferred on others. In particular, these windfall costs and gains can result when accounting entries for the two sides of a payment, that for the payor and payee, are not posted simultaneously. The accounting effects of the asynchronous posting of payment entries to the accounts of the payor and payee are known as float. The ideal connection between clearing and settlement times can be broken, particularly when intermediaries are involved in a transaction and when systems used to transport and process payments are relatively slow or unreliable. In such circumstances, special attention needs to be given to the accounting treatment of payments.

This chapter explains the significance of payment system float for individual participants in the payment system and as a public policy issue. It describes the mechanics by which payment system float is generated and explains both why float is important from the business and public policy perspectives and some of the causes of float. It then describes the “availability schedule” approach to float management (an appendix presents a detailed example of how to construct such a schedule), and also describes bank cash management services designed to help bank clients manage float.

The Mechanics of Float

Consider the following transactions made by cash, check, and credit transfer. If an obligation is settled using cash, the payor gives up the cash at the same instant that the payee receives it. The payee is able to use the cash just as the payor was able to use it an instant before the exchange. Alternatively, if a payor settles an obligation using a paper debit instrument such as a check, say, late on a Friday afternoon, it may be several days before the payor’s bank account is debited for the check. Thus, by using a check, the payor has initiated payment but retains use of the funds for several days. The result of delayed processing will be somewhat different in a credit transfer, with the payor possibly losing the use of funds before value is transferred to the payee. The key benefit of retaining use of funds while a payment is being cleared is the interest income that can be earned by investing the funds.

Thus, payment system float is the balance sheet effect of crediting (in a debit transaction like a check) or debiting (in a credit transaction like a payment order) the bank account of the entity originating a payment before the offsetting entry is made to the account of the entity receiving the payment. The presence of float can affect any of the parties to a payment—the payor, the payee, either party’s bank, a third commercial bank that is an intermediary to the transaction, or the central bank.

Because of float, some parties may have the use of funds that enter the payment process at the expense of others who are legally due the funds. If banks pay interest on transaction accounts from which payments are initiated and to which receipts are credited, or if there is a market in short-term funds, short-term funds have investment value. Which of the parties to a payment has the opportunity to invest these funds during the payment process depends on (1) whether the payment is made using a debit or credit instrument—for example, a check or a payment order; (2) whether the instrument is electronic or paper—in paper-based transactions it is more difficult to enter all the information into accounting systems simultaneously; (3) the presence of incentives that encourage parties deliberately to delay or to speed up processing of payments; and (4) whether there are rules in force to ensure timely and uniform processing and posting of entries to customers’ accounts.

Credit Payments

Assume that firm B supplies goods to firm A. Firm A elects to pay for the goods using a credit instrument, such as a payment order through a giro system. Firm A instructs its bank, bank X, to credit firm B’s account at bank Y. The flow of goods and payment is shown in Chart 1.

The first step in the payment process will be for bank X to debit firm A’s account. Some time can then elapse before funds are credited to firm B’s account at bank Y because of processing time at bank X, time to transport the payment instruction to bank Y, and processing time at bank Y. As a result, firm A’s account will be debited and bank X may have use of the funds if there is a delay before they are actually transferred to bank Y. Similarly, once bank Y receives the funds and until it credits firm B’s account, bank Y has use of the balances. Under these circumstances, banks X and Y have gained the use of funds at the expense of their customers. It is not hard to see that it could benefit the banks deliberately to delay the processing and crediting of payments to customer accounts.

Float can occur at another potential level, with different implications from those just outlined, which involves the central bank as a payment intermediary between commercial banks. Payments can be cleared and settled in several ways, and the exact mechanism will be crucial to how float is generated. Typically, however, the central bank plays a crucial role in interbank settlement, as value is transferred between banks X and Y through their nostro accounts at the central bank. The process can be generalized as illustrated in Chart 2.

Chart 2.
Chart 2.

Credit Payment Flow and the Central Bank

If the central bank debits the nostro account of bank X at the same time it credits that of bank Y, no central bank float is generated. If, however, the central bank debits bank X’s account and there is a delay before it credits bank Y’s account, the central bank would have the use of float at the expense of the banking system as a whole. This is central bank credit float that decreases the nostro balances of the commercial banking system at the central bank, thus decreasing commercial bank reserves.

Central bank credit float could arise because the central bank is inefficient at processing or, in paper payments, because of distances between central bank payment processing centers and commercial banks. Alternatively, central bank credit float might occur only periodically, as a result of delays caused by peak processing loads or occasional operational problems.

Debit Payments

Most of the literature on float deals with the debit float generated in connection with check processing. The literature on float comes mainly from the United States, where, in contrast to most European countries, checks are overwhelmingly the most important payment instrument, at least in terms of the number of transactions.

Chart 3 illustrates the flows involved in check payments. Continuing the earlier example, firm A knows that if it gives firm B a check when it takes delivery of goods, it will take some time before its account at bank X is debited. In the meantime, firm A will continue to have the use of the balances that will eventually be used to settle the payment obligation. In fact, firm A’s finance director may even take the risk of not funding the account at bank X until he expects the check to be presented, instead using the funds for other purposes, such as short-term money market investments. Management of cash balances is an important aspect of a firm’s overall financial management. The effect of payment patterns, including both disbursements and receipts, is an important part of cash management. Accordingly, as discussed below in the section on cash management, banks have begun to offer rather sophisticated payment services to their corporate customers that are designed to minimize the idle balances held to fund payments.

As in the previous example, a number of levels of float are generated when debit instruments are used. At the bank customer level, if bank Y credits firm B’s account when a check is deposited but before bank X debits firm A’s account, firm B gains the use of funds before firm A’s account is debited for those funds. Essentially, bank Y is making an interest-free short-term loan to firm B during the time it takes to clear the check.

As described in Chapter 2, and as with credit instruments, interbank settlement can involve transfers across banks’ nostro accounts at the central bank, thus creating the potential for float between the central bank and the commercial banks. In this case bank Y, the bank at which the check has been deposited, will be quick to advise the central bank to credit its nostro account. If the central bank provides credit before it debits the account of the bank on which the check is drawn, in this example bank X, the central bank will be creating debit float. The central bank debit float created by this practice increases the reserves of the banking system. The central bank is effectively granting the commercial banking system as a whole a subsidy in the form of an interbank loan. This subsidy is ultimately paid by the taxpayer because it reduces the earnings of the central bank.

In relatively small countries where distances between processing centers are not great, transportation delays should not lead to major problems with debit float. Assuming major backlogs do not occur in the central bank’s own processing, it will not be too difficult to make the credit and debit entries to the banks’ nostro accounts on the same day. But in larger countries with many processing centers and where checks are transported over long distances, several days can elapse between the posting of credit and debit entries. For instance, a central bank branch in one part of a country could credit the account of a bank in its region and then send details of the transaction to another of its branches or processing centers or directly to a commercial bank thousands of miles away. In the United States, in particular, a great deal of careful design and execution has been devoted to the transportation aspects of check processing to meet the challenges posed by vast distances. Moreover, as discussed in Chapter 8, new methods whereby paper checks are converted into electronic instructions, called check truncation, are being more widely used.

The debit float generated through processing of debit payments has different effects than those generated by credit payments. In debit instruments such as checks, banks’ customers can gain float at the expense of the banking system. Also, commercial banks may gain float at the expense of the central bank. Table 1 summarizes the types of float generated as a result of using different types of instruments and by account relationship.

Table 1.

Types of Payment System Float

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Importance of Float

Why is float important? Key issues include the distortions that float can cause to the incomes of economic actors and the problems that it can cause for the implementation of monetary policy by making it more difficult to assess the demand for and supply of bank reserves. The existence of float means that one of the parties to a payment transaction—an enterprise or individual bank customer, a commercial bank, or the central bank—is either granting or receiving free or subsidized credit. Who gains and who loses payment float depends on how payment instructions are cleared and whether credit or debit instruments predominate. Clearly, float effects are potentially greater in a paper-based system, in which processing and transportation delays are potentially lengthy, than in an electronic system, in which such delays should be much shorter.

The value of float can be substantial. Float value is calculated by determining the return on investment of funds during the period that the float exists. For example, if the annual interest rate is 10 percent, the value of $1 million in float for one day is computed as

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The higher the market rate of interest and the longer the float time, the greater is the value of the float.

Because float has value, it influences choices made by payment system participants regarding the type of instruments they use and the processing options they follow. By definition, float is a zero-sum game, that is, total float gains exactly offset total losses. In this sense, the social costs of float might be thought of as being zero. But the income redistribution effects resulting from float are arbitrary and unlikely to be in any sense optimal. More important, the incentives provided by float to take actions to be a net gainer in the “float game” can degrade the effectiveness of the payment system. The damage that float can do to the reputation of the banking system as a whole is well recognized. To minimize these costs and help ensure an efficient payment system and maintain public confidence, participants in most mature payment systems have agreed to rules governing the minimum times within which payments must be delivered and processed and funds made available to payees. Because of their responsibility for the safe and efficient operation of the payment system, central banks usually play an important role in setting these rules. Even if such rules exist, attempts to exploit float can lead to increased credit, liquidity, and fraud risks to participants. It can also increase the difficulty of implementing monetary policy. Accordingly, from a public policy standpoint, float is undesirable and should be minimized.

Credit and Liquidity Risks

Good banking practice requires that lenders have the ability to assess, and that they actually do assess, the creditworthiness of borrowers. As suggested above, however, payment system inefficiencies can result in commercial banks supplying credit to their customers under operational circumstances that make it difficult for the credit assessment to be made. Moreover, banks themselves can use central bank credit that results from the operation of the payment system in a manner that prevents careful assessment by the central bank of its counterparty credit risks (see Chapter 7 for a discussion of these risks). Further, delays in settlement, especially unanticipated delays, can cause liquidity problems for payment system participants who expect payment as a result of legitimate transactions in the marketplace but whose receipt of value is delayed by payment system inefficiencies. Unfortunately, circumstances may make it possible for payment system participants to manipulate the payment system in order to generate float, reducing its efficiency and thereby causing liquidity problems for other participants.

Fraud Risks

Clearing and settlement procedures that generate large volumes of float, particularly debit float, can increase the risk of two important types of fraud against the banking system. When bank customers use debit instruments, such as checks, to move funds between accounts, they can gain debit float at the expense of the banking system. Check “kiting” is the process whereby bank customers deliberately generate debit float in their favor. Kiting is accomplished by holding a series of bank accounts, usually in different banks in a variety of distant locations and artificially multiplying deposits in these accounts by writing and redepositing checks between the accounts. This is done with the knowledge that the checks will take some time to clear, thus increasing temporarily the balances in the accounts if the banks at which the deposits are made provide funds based on the deposit but before the checks clear.

Check kiting is an overt manipulation of the payment system that can result in two types of fraud. First, by definition, kiting results in banks unintentionally providing credit to the entity operating the kiting scheme, which results in loss of income to the banks, as the customer uses the funds for investment purposes. Improved processing and the application of availability schedules (discussed below) can address this type of fraud. Also, a second form of fraud can involve the theft of principal, if the customer does not intend to pay the checks. To help protect against this form of kiting-related fraud, usual banking practice is to grant provisional credit for check deposits, that is, funds may not be withdrawn until the bank is confident that the check can be collected.

Impact on Monetary Policy Implementation

Variability in the delivery and processing of payments can mean that float fluctuates widely. One consequence is that bank reserves can also fluctuate widely, making it difficult for the central bank to estimate the day-to-day demand for reserves. This, in turn, adds uncertainty to the execution of open market operations. If the central bank can predict accurately the inflows of funds to and outflows of funds from the commercial banking system in connection with the operation of the payment system, it can do a better job of hitting monetary policy targets, particularly short-term interest rate targets. Given good information flows, and an efficient market, central banks can generally target short-term interest rates quite accurately. An efficient payment system adds a degree of stability to the setting of monetary policy.

Causes of Float

The earlier discussion outlined how payment system float is generated and pointed out some of the effects that float can have on payment system efficiency. Rules and procedures are necessary to establish and enforce performance standards for payment system participants to minimize float. Such rules and procedures should address the particular types of delays that can lead to float.

All of the operational causes of float discussed below are relevant whether debit or credit payments are being processed. Inefficiencies are more likely to occur in connection with paper-based processing than with electronic processing. Nonetheless, even electronic systems can generate considerable float, especially when they are not fully integrated with bank accounting systems used to post customer accounts.

Four major causes of float are discussed below. These are posting procedures, transportation, holdovers and backlogs of payments, and processing errors.

Posting procedures float arises from the practice of posting an interbank transaction to a customer’s account before making an entry for the other side of a transaction. For example, this float occurs when a bank gives credit at the time its customer deposits a check but before it receives credit for the check from the paying bank. That is, the bank receiving the check does not take into consideration the time that is normally needed to present the check and receive payment. This type of float can be reduced by adjusting posting procedures using deferred settlement and availability schedules, as discussed in detail below.

Transportation float occurs because paper payments must be transported between the various participants in the payment system. Transportation delays can be considerable in large countries where payment instruments are transported over slow transportation networks. This float can be reduced by using dedicated air and ground-based transportation networks designed to expedite the movement of value.

Transportation float can also be reduced by utilizing electronic delivery, especially for large-value payments. Electronic delivery helps ensure same-day delivery, processing, and posting of the largest-value payments. In most countries with well-developed financial markets, a relatively small number of large-value payments account for a very high proportion of the total value of payments. If these payments can be completed within one day, float can be significantly reduced. Especially if the volume of payments is not high, the technology required for an electronic large-value transfer system need not be complex or unduly expensive. Float arising in connection with these largest-value payments can be eliminated using properly controlled telephone, telegraphic, or computer-to-computer techniques to transfer funds. As discussed in Chapter 6, developed economies rely on specialized large-value transfer systems, an important feature of which is that they do not generate float.

Holdover float is generated when a payment is only partially processed during a business day. Holdover occurs when a commercial bank debits its customer for a payment order or gives credit for a check deposited but does not complete processing and forward the payment by the end of that business day. Backlog float is similar to holdover float. In backlog float, however, the payments are not even partially processed. Rather, processing is delayed, as is accounting, owing to backup in workloads.

Holdover and backlog float can be avoided if sufficient processing capacity is available to process the volume of payments received on a same-day basis. That is, the proper types and amounts of equipment and staff must be available to handle each day’s payment volumes. These resources need to be flexibly managed to efficiently handle low-, average-, and high-volume days.

Processing error float is created when errors occur during the handling of payments, including accounting for payments. For example, errors can result from payments being sent to the wrong bank, lost in transit between banks, or recorded in the wrong amount. During the time it takes to detect and resolve such errors, float is generated. Careful monitoring of work quality can reduce handling errors and processing error float. When errors do occur, an effective and timely error correction process will help contain the float that is generated by shortening the time needed to correct the error. To be effective, procedures for handling errors must be published, accepted, and used. Bank compensation rules commonly provide incentives for the speedy resolution of processing errors that arise in the payment system.

Availability Schedules

Although it would be ideal if the payment system functioned perfectly and all processing occurred in a timely, error-free manner, this is not a practical goal. At some point, the costs of reducing float by incurring added processing and administrative costs will outweigh the benefits. Nonetheless, float can be significantly reduced by synchronizing relevant accounting entries.

Float can be reduced by the use of funds availability schedules. The purpose of availability schedules is to synchronize the accounting performed for both sides of a payment. Availability schedules recognize the physical constraints that cause delays, such as processing and transportation, and attempt to compensate for the delays by adjusting the timing of accounting to achieve near simultaneity for entries to accounts even if physical handling of a payment results in processing and/or transportation delays between the payor and the payee.

For example, the debit to an account for initiating a payment order could be delayed to approximate the time it normally takes to process, deliver, and post the credit to the receiver’s account, thereby reducing float in the banking system. Similarly, the credit for a check could be delayed to approximate the time it normally takes to process, deliver, and post the offsetting debit to the payer’s account. These methods essentially tie the timing of accounting for the payment to the timing of the physical handling of the payment. The timing of the accounting entries is known as an availability schedule.

Although use of an appropriately designed availability schedule will reduce float, this method does not improve the speed or reliability of the payment system. Indeed, use of availability schedules, at least in debit payments, may diminish incentives for banks to improve the timeliness of the payment process. A detailed description of how an availability schedule is calculated and how it would be applied in daily processing is given in the appendix. The example is based on a payment system that relies on central bank processing centers and paper-based credit payments.

The example in the appendix raises a number of key issues that need to be addressed when availability schedules are being designed, including the proportion of local and interregional payments in the mix of total payments and the average transportation times for payments sent to and received from various destinations. The appendix makes clear that designing an availability schedule involves a trade-off between the goal of eliminating float and additional procedural and operational complications. Availability schedules should not be overcomplicated so that their use requires an undue amount of time and resources.

Cash Management Services

The analysis of float presented here suggests that enterprises, commercial banks, the central bank, and even individuals can increase income by carefully managing their payment flows. Similarly, the opportunity costs of failing to manage temporary cash balances effectively can be high. This has not escaped the notice of the treasurers of large corporations in particular.

As pressures on firms to minimize costs and maximize revenue intensify and as financial markets spawn new, convenient short-term investments with low transaction costs, corporate treasurers have found more sophisticated ways to avoid the cost of, or even to enjoy the benefits from, payment system float. Competitive pressures have forced commercial banks to offer their larger customers—both corporations and correspondent banks—a range of services to help them manage their cash balances more efficiently and profitably. Although not treated here, some retail banking products, such as overdraft protection for transaction accounts, also offer similar services to consumers.

The types of cash management services offered by banks to their customers fall into three main classes: (1) cash concentration; (2) disbursement; and (3) investment.

Cash Concentration

Many firms need to hold accounts that serve a variety of functions. These accounts are often held in different locations and at different banks. Banks offer services to permit their customers to manage funds held in several accounts easily and efficiently. These concentration services help customers avoid overdrafts and minimize transaction costs of transferring funds between accounts. In this way, corporate treasurers can focus on managing the balances in a single account without having to worry about intra-firm funds transfers.

Disbursement

Banks can also help firms to improve the timing of payment flows, which is crucial to the management of cash balances. Float generally lasts only a few days at most, so firms and banks wanting to control it need highly developed information systems to allow them to anticipate and track payment flows and identify short-term idle balances. Commercial banks’ computer programs that monitor customer accounts provide a natural basis for providing a range of cash management services to clients. Rather than delaying sending details of account balances days after entries have been posted to accounts, banks often provide daily updates of customer balances. Larger customers with high values of payments and receipts increasingly demand on-line access to bank computers to allow them to monitor payment flows to and from their accounts during a day.

It is not sufficient for firms to be able to monitor their account balances to exploit float. They must also be able to predict payment inflows and schedule payment outflows closely to ensure that balances are optimized. Banks have responded to these demands by helping firms to identify payment patterns and forecast likely flows. They have also provided their customers with facilities to schedule payment outflows on particular days, or at particular times during a given day, and to make payments that are guaranteed to be credited to beneficiaries’ accounts on the day they are made. These disbursement services rely on the cash pooled from the concentration process described above.

Automatic Investment Services

As well as coordinating their payment flows to minimize float and avoid charges for overdrawing their accounts, banks’ customers are increasingly seeking to ensure that credit balances do not lie idle, even for quite short periods. Another type of cash management service facilitates the movement of balances from customers’ transactions accounts into investments. For customers without expertise in financial markets or sufficiently large balances to justify a dedicated investment staff, banks offer “sweep” services. Using sweep services, customers can automatically transfer balances above a nominated amount to overnight investment outlets such as securities repurchase agreements or Eurocurrency deposits.

Conclusions

Float can cause significant distortions to the payment system and decrease its efficiency. In addition to its effect on individual payment system participants, float is an important public policy concern because it affects the efficiency of the entire payment system. Two broad approaches to dealing with float have been identified in this chapter. First, improvements in delivery and processing efficiency reduce the delays that lie at the heart of the float problem and bring better service to the customer. Such improvements, however, can be costly, especially in a paper-based payment environment. A second means of controlling float is to use availability schedules that synchronize accounting entries for the payor and payee regardless of the time it takes to process the physical payment.

APPENDIX Reducing Float Through Funds Availability Schedules

This appendix uses an example to explain how float is generated. It also shows how the application of funds availability schedules can help reduce float. The particular example is that of a country in which the central bank plays a large processing role in the payment system and operates a network of branches or processing centers. The example would work equally well, however, for a commercial bank clearing payments through private clearing organizations. The example is based on credit payment orders, denoted in dollars.

  • The example makes several simplifying assumptions: Only two central bank processing centers exist, namely, CB A and CB B. Each central bank center accepts payment instructions from commercial banks within its region for delivery to other local commercial banks or to the other regional central bank processing center that will, in turn, deliver the payments to commercial banks in its region. CB A and CB B have their own computer centers. Three banks exist in CB A’s processing territory, namely, bank A, bank B, and bank C.

  • The analysis shows the availability calculations for “mixed” deposits only. Mixed deposits contain both “local” payments and payments destined to commercial banks in the other central bank processing center region. These mixed deposits would normally be received from local commercial banks. Accounting for local payments is performed on the day of receipt.

  • The example uses three days of fictional data. In calculating actual availability schedules under real-world conditions, a minimum of two weeks’ data is needed; a month’s data would be preferred. Availability schedules should be updated regularly as physical delivery and processing times change.

  • The availability schedules are developed in terms of banking days designated as DAY 1, DAY 2, DAY 3, etc. It is assumed that payments are not transported on nonbanking days.

Deposit Data

The fictional data used in this example appear in Table A.1. The table shows all mixed payments deposited at CB A for a three-day period, DAY 1, 2, and 3. On each day, each bank in CB A’s local area makes one deposit. No payment instructions are received from CB B. As can be seen from the table, total mixed deposits of $750 consist of $375 of “local” payments and $375 of “nonlocal” payments destined for banks in the CB B region.

Table A.1.

“Mixed” Deposits of Payment Orders at Central Bank Processing Center A

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Common Method of Processing

If posting procedures simply reflected delivery and processing of paper, the central bank would handle the $250 submitted in mixed payments on DAY 1 by debiting the payor’s account on the processing date DAY 1. The local items in those payments ($175) would be credited to the receiving bank’s account on that same date DAY 1, since they are sorted and prepared for delivery on the processing date. The nonlocal items, totaling $75, would not be credited to the receiver’s account until the items were received and processed at CB B. In the example, assume this occurs five days after processing at CB A—that is, not until DAY 6. These processing and accounting actions are summarized on the first two lines of Table A.2. The result of these postings is also indicated in terms of float. There is no float for the local transactions. There is, however, $375 of float (5 days × $75 = $375) for the items sent to CB B.

Table A.2.

“Mixed” Payment Order Clearing Experience

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The remainder of Table A.2 shows the results of processing the remaining two days’ worth of transactions. In total, the table shows that it takes an average of five days for an item to be sent from CB A and CB B, and that $1,875 in float is created by the mismatch in debits to payors and credits to receivers of items sent from CB A to CB B.

Ideal Availability Schedule

To eliminate float in the example, an availability schedule like that shown below would be needed:

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Use of such a table is reflected in Table A.3, which is identical in format to Table A.2. Here, the five-day deferment of debits to the paying bank for items destined to CB B is shown in column 3. Table A.3 now reflects an exact match between debits to the payor and credits to the receiver for local and nonlocal items. Although delivery and processing routines are unchanged, changed posting procedures have eliminated central bank float.

Table A.3.

“Ideal” Use of Deferred Availability

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This is an “ideal” availability schedule in that there is no central bank float and each payor is given a deferment that exactly corresponds to the mix of work it sends.

Practical Application of Availability Schedules

To achieve the ideal outcome described above, each payment item in the group would need to be examined for destination and then classified as either a zero-day local item or a five-day nonlocal item. Once all items were classified, totals would be calculated for each category and these totals would need to be balanced to a grand total for the deposit. In a manual environment, this process would be slow and error prone. The process becomes even more difficult where there may be 10 to 20 deferment classifications. Thus, this ideal outcome may need to wait until processing of payments (that is, sorting and accounting) is automated.

There are other, less complex, ways to implement availability schedules, two of which are “split availability” and “average availability.” Both of these methods apply the average payment experience of the central bank to each deposit of mixed payments, no matter what its exact makeup. The use of this average expedites processing by eliminating the need to classify every item.

Split availability splits the availability for each set of payments across the dates in the availability schedule according to the average payment experience of the central bank processing center. In the example, CB A has a schedule of “zero days” for local items and “five days” for nonlocal items. Table A.1 shows that the average make-up of a set of payments is 50 percent local and 50 percent nonlocal. Thus, the application of “split availability” would mean each set of mixed payments at CB A would be given 50 percent availability on DAY 1 and 50 percent availability on DAY 6. Bank A’s payments on DAY 3 of $75 would be given an availability of $37.5 on DAY 3 and $37.5 on DAY 8 (this would not match the exact make-up of its payments on that date). This method aims at zero central bank float over time but recognizes that on any given day there may be debit or credit float. A drawback is that some commercial banks may benefit or lose over time relative to other commercial banks depending on how close their mix of items corresponds to the average. All paying banks gain from implementation of this method in that a portion of their debit will be deferred.

Average availability also utilizes the central bank processing center’s average processing experience. In this case, however, availability for a payment is not split over multiple dates. Rather, all availability is given on the average deferment date. In the example, while “split availability” means that 50 percent of availability is given on DAY 1 and 50 percent on DAY 6, average availability means that all availability should be given 2.5 days after the date of deposit. Since this is not possible, availability would need to be given on DAY 3 or DAY 4. If DAY 3 is chosen, a small amount of central bank credit float will remain ($375). If DAY 4 is chosen, a small amount of central bank debit float will be created ($375) (see Table A.4 for the calculation of these residual float amounts). If DAY 3 is chosen, the availability schedule would be

Table A.4.

Calculation of Central Bank Float-Average Availability

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For bank A’s mixed deposit on DAY 3 of $75, all $75 would be debited on DAY 5.

This alternative has the advantage of simplicity in terms of operations and accounting. It will generate some central bank float but this will be much smaller than if no availability schedules were in force. Like split availability, some commercial banks may benefit or lose over time relative to other banks depending on how close their mix of items corresponds to the processing center average. However, all depositing banks gain the use of funds that are not available to them without availability schedules because the debit for their deposit is deferred two days. A further refinement of these techniques would apply separate availability schedules to each bank. Each bank’s schedule would reflect its particular make-up of payments. This method addresses the inequity noted above that can arise under split and averaging systems. The trade-off is in the cost and complexity of operating such a system.

Design, Management, and Supervision