What Is Float in the Banking Industry?
Float as defined in banking refers to the latency between a check’s deposit to an account and an issuing bank’s recognition of that deposit. In other words, for a brief period of time, multiple banks may believe that they are in possession of the same money. Float is important in terms of large-scale banking phenomena. After all, considering that Americans process nearly $70 million checks every day, even minor amounts of float per check can lead to major discrepancies in overall banking monetary policies.
There are a number of causes of banking float. One of the primary problems for Federal Reserve bean counters in the 1970s was that inflation at home led to massive investment in overseas disbursements to take advantage of what was known as transportation float.
In other words, overseas and domestic banking conglomerates had a difficult time talking to one another about check processing, and this allowed companies to use the float delay to their financial advantage.
Thanks to a number of regulations and standards passed in the 1980s, banking float was brought under control. Starting in the mid-1990s, as more and more major banking groups switched over to electronic fund transfer mechanisms and online banking, Federal Reserve watchers saw changes in the national float levels.
Today, banking groups can now process and communicate check deposits rapidly, so the latency between a deposit and the issuing bank’s recognition of that deposit has diminished.
This isn’t to say that electronic banking has completely eliminated float, indeed, computer glitches and inaccuracies in electronic filing systems have in certain isolated instances created large float related problems.
Banking float can also impact the ways in which international investors conduct agreements and cultivate accounts. As more and more American firms invest in overseas banking options (and vice versa), international sources of banking float may once again resurface, requiring yet another adjustment to the Federal Reserve’s policy about how to manage banking accounts for optimal efficiency.