Float is the temporary inaccuracy of a bank balance due to the period between when a check is deposited and when the issuing bank acknowledges that deposit. The net float is the sum of the disbursement float and collections float in an account. The Check Clearing for the 21st Century Act expedited the processing of checks between banks, increasing the likelihood that bad checks will be available to cover the check. Although banks can receive funds electronically soon after a deposit is made, the funds are not available for use by the account holder until the next day.
In banking and finance, the term float refers to the temporary inaccuracy of a bank balance in an account that occurs due to the period between when a check is deposited and when the issuing bank acknowledges that deposit. During this dormant period, both banks claim ownership of the funds. A given bank account may have a disbursement float, money spent that the bank has not yet removed from the account, and collections floats, money on deposit that the bank has not yet cleared from the account. The net float is the sum of the two types of float in an account. An account holder can calculate an exact bank balance by adding the net float of the previous account balance.
For example, Joe’s Hot Dog Stand has a previous account balance of $10,000 US Dollars (USD). Joe has written three checks, totaling $2,000 USD, that have not cleared the bank. He has deposited some checks, totaling $3,000 USD, that have not cleared to his account. Net account float is calculated by subtracting the disbursement float, the $2,000, from the collections float of $3,000, yielding a net float of $1,000. Joe’s Hot Dog Stand has a checking account balance of $11,000 USD, the sum of the net float and the previous balance.
Before electronic banking and debit cards, some bank customers would illegally engage in check writing, a practice that capitalizes on float time. A customer would write a check for more money than his account contained. Just before the check would clear, resulting in an overdrawn account, the customer would deposit a check from another account into the overdrawn account, again with no funds, or make an actual deposit into the account. If convicted, a bank account holder who has cashed checks can be fined up to $1 million dollars and sentenced to up to 30 years in prison. The Check Clearing for the 21st Century Act, enacted in October 2004, expedited the processing of checks between banks, increasing the likelihood that bad checks will be available to cover the check.
Although banks can receive funds electronically soon after a deposit is made, the funds are not available for use by the account holder until the next day. This money, called a negative float, can be invested by the bank overnight to generate income for the bank. While the Check Clearing for the 21st Century Act expedited the processing of checks, it did not expedite the bank’s process of making deposited funds available.
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