Float

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)      

This term has two meanings:

1. To market securities; to offer for sale an issue of bonds or stock to investors for the purpose of raising capital.  Securities may be floated by an underwriting syndicate or securities company or by the issuing organization directly, i.e., over the counter.  U.S. government issues are floated through the agency of the Federal Reserve banks.

See SYNDICATE

2. An account (also known as floating account) which holds the out-of-town checks outstanding in the process of collection.  Banks forward out-of-town checks for collection through either correspondent banks or Federal Reserve banks as collecting agents.  While such checks are in transit, i.e., in the process of becoming collected and converted into cash, they are known as the float and represent contingent rather than actual assets.  They cannot be counted as reserve and must be segregated from cash balances.  The float or aggregate of out-of-town items in process of collection is held in two general ledger accounts entitled "due from banks, collections" and "Federal Reserve bank, collections."  The Federal Reserve banks also have a float account consisting of the aggregate of out-of-town items which are in the process of collection for member banks.  Before the FEDERAL RESERVE CHECK COLLECTION SYSTEM was in operation, the float for the country as a whole amounted to a very large figure, because checks were often out a month or moe before presented for final payment.  The Federal Reserve check collection system has greatly reduced the outstanding float and accelerated the collection of checks by ensuring prompt presentation and because of the quick availability made possible by settlement through the two-day deferred availability schedule and the INTERDISTRICT SETTLEMENT ACCOUNT.  The Federal Reserve check collection system has also reduced the loss in the use of funds and consequently secured greater economy in the employment of bank funds for exchange purposes, which has been reflected in lower exchange rates.

Federal Reserve pricing for float:  The Monetary Control Act of 1980 specified that fees will be set for the types of services provided by Federal Reserve banks, which include Federal Reserve float.  The Federal Reserve's August, 1980, pricing proposal suggested a three-phase effort to reduce and/or price Federal Reserve float.  Phase I would reduce float through operational improvements which would speed up the collection process and thus debit payor banks more promptly, phase II would adjust availability schedules for depositing banks to reflect actual collection time more closely, and phase III would price any remaining float and incorporate this charge into the price of the service creating the float.

BIBLIOGRAPHY

The BASI Survey of the Check Collection System.  Bank Administration Institute, Rolling Meadows, IL, 1987.

"The Tug-of-War Over 'Float."  The Morgan Guaranty Survey, December, 1983.

YOUNG, J.E.  "The Rise and Fall of Federal Reserve Float."  Economic Review, February, 1986.

"The Rise and Fall of Federal Reserve Float."  Federal Reserve Bank of Kansas City Economic Review, 1986.

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