Float (money supply)

In economics, float is duplicate money present in the banking system during the time between a deposit being made in the recipient's account and the money being deducted from the sender's account. It can be used as investable asset, but makes up the smallest part of the money supply. Float affects the amount of currency available to trade and countries can manipulate the worth of their currency by restricting or expanding the amount of float available to trade.

"Float is money in the banking system that is counted twice, for a brief time, because of delays in processing checks", as defined by the Federal Reserve Bank of New York. It is most obvious in the time delay between a cheque being written and the funds to cover that cheque being deducted from the payer's account. Once the payee or recipient of a cheque deposits it in a bank account, the bank provisionally credits the account and thus increases the payee's account in demand deposit, assuming that the payer's bank will ultimately send the funds to cover the cheque. Until the payer's bank actually sends the funds, both payer and payee have the "same" money in both of their accounts. Once the payee's bank notifies the payer's bank by presenting the cheques, the "duplicate" funds will be removed from the payer's account, and the cheques will be considered to have "cleared" the bank.

In cheque clearing, banks refer to 'bank float' and 'customer float'. 'Bank float' is the time it takes to clear the item from the time it was deposited to the time the funds were credited to the depositing bank. 'Customer float' is defined as the span from the time of the deposit to the time the funds are released for use by the depositor. The difference between the bank float and the customer float is called 'negative float'.

Anything that delays clearing a check can cause a float. Float is subject to random fluctuations. Before electronic cheque clearing, bad weather or communication problems caused float to increase, so it had clear seasonal trends. In December and January, increased check volume of the holiday season increases the so-called 'holdover float'. A backlog of checks from the weekend causes float to be high on Tuesdays, therefore causing a weekly trend. Also causes may be summarized as deliberately, inefficiency, logistical situation and compensation mechanism.

Float marginally inflates the money supply. Countries can manipulate the worth of their currency by restricting or expanding the amount of float available to trade The float time of checks can be used to defraud, by misusing it as a form of unauthorized credit, commonly known as cheque kiting.

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Wikipedia