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Banks Carry the Cost of the Nation's Currency
By Peter J. Sposito
The Federal Reserve System supplies the banking industry with the Nation's currency and they do not charge for the vault services provided. The Fed does this to comply with its mandate from the Treasury to provide the banking public with the basic "commodity" required to transact business. Banks, in turn, have traditionally not charged its customers for cashing checks and taking cash deposits.
One would assume therefore that the costs of handling incoming and outgoing cash is simply an incidental cost of providing banking services. Such an assumption is grossly erroneous. I have not yet gathered empirical data, however, I know that handling cash is extremely expensive. Tellers, ATMs, armored courier services, vault capital and maintenance expenses, security systems, insurance, audit and accounting services, supervisory and management salaries, and write-offs of lost currency all add up to a significant expenditure. Historically, we have built branch networks to primarily meet the need to distribute and collect cash. And although most agree that branches are becoming sales and marketing driven, the traditional cash handling costs remain.
Our non-bank competition does not offer cash deposit and withdrawal services. They have made a financially sound decision. Merrill Lynch, Fidelity, Travelers, American Express and other financial service giants leave such servicing to the nation's depository institutions. (The key word being 'Depository.') I wonder if banks' customers properly value the cash services offered by banks as they wait at a teller's counter reading a rate board that most likely lists rates that are not competitive with the brokers' money market accounts.
Our studies indicate that vault cash at most banks now exceeds required reserves. Accordingly, banks carry a real cost of funds for every dollar in excess of required reserves (Reserves are also an expense load not shared by our competition).
To impose customer charges for cash handling would be suicidal for an industry that is considered by the public to be a "utility." However, maybe now is the time to suggest that the high costs of cash handling should be shared by all financial institutions, including the Treasury and non-depository financial institutions.
Pending legislation would enable banks to pay interest on business checking accounts. The same bill [Senate Bill 229] would enable the Federal Reserve to pay interest on reserves, though our interpretation is that interest would be paid only on the electronic account held at the Fed. Maybe our industry should lobby to enable payment of interest on the vault cash portion of reserves as well. If banks have been designated as the distribution channel for the nation's currency, the government should provide the inventory with no carrying costs.
Alternative payment devices, such as debit/credit cards, direct deposits, smart cards and others, will not likely supplant cash for a variety of reasons. The new electronic options are more efficient than cash, however, the public continues to prefer to hold hard currency. We, as an industry, need to become aware of the burden of cash costs and to find a way to share the load.
Peter J. Sposito is the President & CEO of Bankers' Bank Northeast, a financial institution owned by banks that provides correspondent banking products and services for community banks in New England and New York. Bankers' Bank Northeast is based in Glastonbury, Conn. and currently serves more than 75 banks. Nationally, there are 18 Bankers' Banks that provide products and services to more than 5,000 community banks in 48 states.