What’s the float?
Financially, the floats are money in the banking system that is momentarily counted twice owing to deposit or withdrawal delays. The processing of paper checks is primarily to blame for these delays. When a consumer deposits a check, the bank credits their account. Receiving and recording a payer’s bank check takes time. The check’s amount “exists” in both the recipient’s and payer’s banks until it clears.
The Fed defines two forms of float. Processing institution delays—typically weekend and seasonal—cause the holdover to float. Due to weather and air traffic delays, transportation float is highest in the winter.
The Fed, which processes one-third of US checks, notes that while float changes randomly, there are weekly and monthly tendencies. Float generally rises on Tuesdays owing to a weekend check backlog and in December and January due to holiday check volume.
These patterns help the Federal Reserve estimate float levels for daily monetary policy.
The formula for float is:
Firmly available balance = float firm’s book balance
The float shows the net result of clearing checks. The average daily float is computed by dividing the total value of checks collected over a period by the number of days. By dividing the float by the number of days outstanding, one can determine the full value of the checks in the collection.
A corporation with a $15,000 float for the first 14 days and $19,000 for the remaining 17 days calculates its average daily float as:
[($15,000 x 14) + ($19,000 x 17)] ÷ 31
= ($210,000 + $323,000) ÷ 31 = $533,000 ÷ 31
Uses of Floats
Folks exploit floats to their advantage. Amanda owes $500 on her credit card on April 1. Despite not having $500 in her bank account, she drafts and submits a check on March 23. By March 25, she anticipates her paycheck to show up in her checking account, but it won’t be until April 1 before the credit card company receives and reimburses her. She has $500 in float for those days—the interval between writing and clearing her check.
If tech-savvy, she could go online on March 23 and schedule an electronic payment on the credit card company’s website for April 1, depending on her bank, to post her salary by March 25.
The Future of Floats
Speedier payment methods have reduced float due to technological developments. These include extensive electronic payments and cash transfers, company direct deposit of employee paychecks, check scanning, and electronic presentation instead of physical transfer.
According to the Federal Reserve, the US float fell from a peak daily average of $6.6 billion in the late 1970s—when inflation and interest rates spiked—to $774 million in 2000.
The gradual drop in checks signed annually and the fast development of new and efficient payment systems may make float obsolete.
Real-World floats Example
Large enterprises and financial institutions often “play the float” with more significant quantities for profit—by speeding up deposits or postponing payment presentations. Such actions are permissible for people and entities with their own money. Fiddling with floats might become wire or mail fraud if it involves using others’ money. The now-defunct brokerage company E.F. Hutton & Company pleaded guilty to 2,000 charges in 1985 for intentionally overdrawing accounts to finance others. The corporation wrote checks on money it didn’t have to profit from the float, borrowing millions from the banks without their knowledge or interest. A massive floating design was executed for years.
The float temporarily inflates the banking system’s money supply, distorting a nation’s supply.
- The float is double-counted money: a paid sum that shows in both payer and payee accounts owing to processing delays.
- Companies and individuals can utilize floats to gain time or interest before payment clears their bank.
- Playing with floats with others’ money might lead to wire or mail fraud.