Float

Float is the money available to households or businesses because checks that they have written have not yet been withdrawn from their bank accounts. Banks have gradually whittled down the number of days that it takes to clear a check. Before the age of modern transportation and electronic check clearing, households and businesses had an incentive to hold deposits in distant banks to increase the amount of float. High interest rates particularly encouraged this practice. Many checks are still cleared in back-office batch processes, and it can take between two or three days and sometimes weeks to clear a check. The time can vary with disruptions in transportation. After the September 11, 2001, terrorist attacks on the United States, unprocessed checks piled up in U.S. banks because air traffic stood at a standstill, leaving banks unable to process checks.

Writing checks on accounts with insufficient funds with plans to deposit money in the account before the checks clear represents another way of exploiting float. A survey conducted during January and February of 2005 indicated that 23 percent of bank customers occasionally wrote checks without sufficient funds in the accounts to cover the check (Credit Union National Association, 2005). The customers usually do not let the checks bounce, but they may end up covering the check by racing to the bank to make a last-minute deposit. Individuals in their thirties and earning no more than $40,000 were among the likeliest offenders. This type of float decreased substantially after Congress enacted the Check Clearing for the 21st Century Act, which became effective in October 2004. Enacted to hasten the adoption of electronic check clearing, the act allows banks to clear checks by sending electronic images of checks instead of hard copies. The use of electronic images can subtract several days from the time taken to clear nonlocal checks.

With the dwindling ability to use float to manage their money, some consumers may switch to credit cards. Credit cards can defer payment much longer than check float, often up to 30 days before interest charges are added.

Commercial banks often hold deposited funds from checks for a length of time before making the funds available for customer withdrawal. If a commercial bank holds the deposited funds for a longer length of time than it takes the checks to clear, the bank enjoys a form of float. It can earn interest on the funds before it allows a depositor to make withdrawals. The Check Clearing for the 21st Century Act did not require banks to give depositors quicker access to funds from checks deposited in bank accounts. Banks can hold deposited funds from local checks for up to two days before making them available to depositors. Nonlocal checks can be held up to five days and checks above $5000 up to 11 days. Although the adoption of electronic check clearing decreases the amount of float available to bank customers, it may increase the amount of float available to banks. Money comes out of customer accounts quicker but does not necessarily go in quicker. In time, competition or regulation will probably force banks to speed depositor access to deposited funds.

Check-kiting schemes make use of float to defraud financial institutions of vast sums of money. In a check-kiting scheme, a bank customer writes a check on one bank account in which there is not enough funds on deposit to cover the check. To cover the insufficient funds, the customer deposits a check written on an account at another bank. This second check is also an insufficient funds check. There can be several banks involved in a check-kiting scheme. By writing checks to cover checks written on other accounts, an individual creates artificially inflated bank balances, which are then used to purchased goods and services from outside parties. Once the scheme is exposed, one or more banks will be left holding large negative balances in check-kiting accounts. In 1997, a Michigan bank lost $2.5 million dollars to a check-kiting scheme.

Federal Reserve float is a type of float that occurs in the Federal Reserve’s check-collection process. It can briefly inflate the amount of money in the banking system. Commercial banks hand over deposited checks to a Federal Reserve Bank. The Federal Reserve Bank credits the commercial banks’ Federal Reserve accounts by the amount of the checks. A prearranged schedule determines how soon the commercial banks’ accounts will be credited after the checks are presented to the Federal Reserve Bank. Usually the accounts are credited after one or two business days. The banks on which the checks are written will pay the Federal Reserve Bank after they receive the checks from the Federal Reserve Bank. It may take more than one or two days for the Federal Reserve Bank to receive payment, in which case Federal Reserve float is created. Before the advent of electronic check clearing, Federal Reserve float could be a significant amount, sometimes requiring the use of open market operations to offset it. Since the 1980s, it has been continually declining.