Introduction to Finance

Depository Institution Transactions 
When a bank borrows from its Reserve 
Bank, it is borrowing reserves, so reserves are increased by the amount of the loan. Similarly, 
when a loan to the Reserve Bank is repaid, reserves are reduced by that amount. The trans-
actions when Bank A borrows $1,000 from its Reserve Bank may be summarized as follows:
1.
Bank A’s deposit at its Reserve Bank is increased by $1,000. The assets of the Reserve Bank are 
increased by $1,000 by the note from Bank A.
2.
Bank A’s excess reserves have been increased by $1,000. It also has a new $1,000 liability, 
its note to the Reserve Bank.
This process is reversed when a debt to the Reserve Bank is repaid.
Federal Reserve Float 
Changes in Federal Reserve fl oat also aff ect bank reserves. 
Float
arises out of the process of collecting checks handled by Reserve Banks. 
Federal 
Reserve fl oat
 
is the temporary increase in bank reserves that results when checks are credited 
to the reserve account of the depositing bank before they are debited from the account of the 
banks on which they are drawn. Checks drawn on nearby banks are credited almost immedi-
ately to the account of the bank in which they were deposited and debited to the account of the 
bank on which the check was drawn. Under Fed regulations, all checks are credited one or two 
days later to the account of the bank in which the check was deposited. It may take longer for 
the check to go through the collection process and be debited to the account of the bank upon 
which it is drawn. When this happens, bank reserves are increased, and this increase is called 
fl oat
. The process by which a $1,000 check drawn on Bank B is deposited in Bank A and cred-
ited to its account before it is debited to the account of Bank B may be summarized, as follows: 
1.
Bank A transfers $1,000 from its Cash Items in the Process of Collection to its account at the 
Reserve Bank. Its reserves are increased by $1,000.
2.
The Reserve Bank takes $1,000 from its Deferred Availability Account and transfers it to 
Bank A’s account.
Thus, total reserves of banks are increased temporarily by $1,000. They are reduced when 
Bank B’s account at its Reserve Bank is reduced by $1,000 a day or two later.
Changes in reserve requirements change the amount of deposit expansion that is pos-
sible with a given level of reserves. With a reserve ratio of 20 percent, excess reserves of $800 
can be expanded to $4,000 of additional loans and deposits. If the reserve ratio is reduced to