Cash and Due from Banks

CASH AND DUE FROM BANKS

Types of Accounts Cash accounts include: - US and foreign currency and coin on hand or in transit - Clearings - Cash items Due From Banks – bank assets that consist of demand and time deposits maintained in other banks to facilitate the transfer of funds Cash - Each bank should establish a policy to maintain cash balances at the minimum levels necessary to serve its customers. - Part 326 requires procedures for safekeeping of currency be established Clearings - Clearings are; checks, drafts, notes and other items a bank has cashed or received for deposit that are drawn on other local banks, and cleared directly with them. - Proof – proving of work - Transit – sending out of town cash items for collection - Objectives of proof and transit system are the same: - Forward items for collection so that funds are available as soon as possible - Distribute all incoming checks and deposits to their destinations - Establish whether deposits totals balance with the totals shown on deposit tickets - Prove the totals of general ledger entries and other transactions - Collect data for computing the individual customer’s service charges and determining the availability of customer’s funds - Accomplish the assigned functions at the lowest possible cost - Common practice is to post all properly encoded debit items, regardless of whether an overdraft is created - Overdraft list should be reviewed and unapproved items should be reversed and separated as returned items. Cash Items - Checks or other items in process of collection payable in cash upon presentation. - Cash items are usually in the custody of one employee at each banking office. - Cash items not in the process of collection should be included in other assets. Examples: - Items not immediately payable in cash upon presentation - Items not paid when presented - Require further collection effort after a predetermined amount of time Due From Banks – Demand Balances Correspondent bank balances that enable the transfer of funds between banks (resulting from the collection of cash items and cash letters) the transfer and settlement of securities transactions, the transfer of participating loan funds, the purchase or sale of Federal Funds, and many other causes Due From Banks – Time Balances Time balances with any bank which are not subject to immediate withdrawal but have the usual time account restrictions - Banks utilize other bank’s to provide certain services - Compensating Balance – minimum balance established for a bank (A) to maintain when another bank (B) performs services for the bank (A) - Reciprocal Interbank Deposits – occur when two banks maintain deposit accounts with each other. - When these deposit relationships involve demand deposits, the net effect should be shown in the examination report. - Reciprocal time balances should be shown gross Deposit Notes Purchased as investments - Similar to negotiable time certificates of deposits (CD), structured like corporate bonds, five-day corporate settlement period for purchases, semi-annual interest payments. Maturities vary from 9 months to 15 years - Issues tend to be rated - Included on the balance sheet in interest bearing balances due from banks (asset category), UNLESS - If the note does not contain a statement referring to the note as a deposit liability, the bank should treat the note as a security or a loan Structured CDs - Customized typically containing embedded options or having cash flows linked to various indices - Investment in structured CDs warrant heightened supervisory attention due to uncertainties - May contain: - Step-up features with call options - Inverse floaters or dual indices - Severe early withdrawal penalties - Lack of established secondary market - Classification of structured CDs should be consistent with the adverse classification guidelines for securities Primary Reserves - Consist of cash and demand balances due from other bank. - Represent a bank’s most liquid assets, except to the degree that they comprise a bank’s required or statutory reserves. - To little of reserve hurts liquidity, to much reserve hurts earnings Policies and Procedures on Interbank Liabilities Regulation F - Covers all credit exposure to a correspondent - Established details for creating policy - Board must review policy annually - Quarterly review of correspondent financial conditions - Bank should limit overnight credit exposure to a correspondent to 25% of the exposed bank’s capital, unless the bank can demonstrate that its correspondent is at least adequately capitalized. (No limits for credit exposure to adequately or well- capitalized correspondents) Concentrations - Aggregate of demand, time due from and Federal Funds sold to one correspondent that equals or exceeds 100% of Tier 1 capital should be listed as a concentration - UNLESS, the excess funds are: - Collateralized by US Treasury or US Government agencies - Backed by US Government obligations - US Government fully guarantees - Object is to inform Compensating Balances - Part 349 requires executive officers and principal shareholders (including their related interest) to report annually the terms and amounts of their indebtedness to correspondent banks to their respective Board - Purpose is to aid in the determination of preferential lending practices