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What does 'Float' mean

Float is money in the banking system that is briefly counted twice due to delays in processing checks. Float is created when a bank credits a customer’s account as soon as a check is deposited. However, it takes some time for the check to be received from the payer’s bank. Until the check clears from the payer’s bank, the amount of the check appears in the accounts of both the recipient’s and payer’s banks.

BREAKING DOWN 'Float'

Since float is essentially double-counted money, it can distort the measurement of a nation’s money supply by briefly inflating the amount of money in the banking system. This can complicate the implementation of monetary policy.

For instance, the Federal Reserve – which processes one-third of all checks in the U.S. – has observed that although the amount of float fluctuates randomly, there are definite weekly and seasonal trends. For example, float usually increases on a Tuesday due to a backlog of checks over the weekend, as well as during the months of December and January because of higher check volume during the holiday season. The Federal Reserve uses these trends to forecast float levels, which are then used in the actual day-to-day implementation of monetary policy.

The Federal Reserve also defines two types of float. Holdover float is caused by delays at the processing institution, typically due to weekend and seasonal backlog. Transportation float occurs due to inclement weather and air traffic delays, and is therefore highest in the winter months.

Float is calculated as:

Float = Firm's Available Balance - Firm's Book Balance

The float represents the net effect of checks in the process of clearing. A common measure of float is the Average Daily Float, calculated by dividing the total value of checks that are in the process of collection during a certain period by the number of days in the period. Total value of checks in process of collection is calculated by multiplying the amount of float by the number of days it is outstanding.

For example, a comapny with $15,000 of float outstanding for the first 14 days of the month, and $19,000 for the last 17 days of the month will have its average daily float calculated as:

= [($15,000 x 14) + ($19,000 x 17)] / 31

= ($210,000 + $323,000) / 31

= $533,000 / 31

= $17,193.55

Technological advances over the years have spurred the adoption of measures that substantially speed up payment and hence reduce float. These include the widespread use of electronic payments, the direct deposit of employee paychecks by companies, and the scanning and electronic presentation of checks (instead of their physical transfer). As a result, float in the U.S. has declined from a record daily average of $6.6 billion in the late 1970s – when it spiked due to high inflation and high interest rates – to only $774 million in 2000. The steady decline in the number of checks written each year, combined with the rapid adoption of innovative and convenient payment services, may make float a thing of the past.

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