Managing a Bank's Currency Inventory Under New Federal Reserve Guidelines

Abstract

New currency recirculation guidelines implemented by the Federal Reserve System (Fed) of the United States are intended to reduce the overuse of its currency processing services by depository institutions (banks). These changes are expected to have a significant impact on operating policies at those depository institutions that handle large volumes of currency. We describe two business models that capture the flow of currency between a bank and the Fed; the first model captures the current operations of most banks, while the second is expected to be adapted by many banks in response to the new guidelines. Motivated by our work with Brink’s, Inc., to assess the economic impact that banks will sustain from these guidelines, we present a detailed analysis that provides managers of banks with optimal strategies to manage the flow of currency to and from the Fed for a variety of cost structures and demand patterns. Given this insight into a bank’s optimal behavior, the Fed can also use our analysis to fine tune its guidelines to achieve the desired goals.

Keywords: currency supply chain; Federal Reserve System; depository institutions; cross-shipping; custodial inventory