Press Release

Recent Innovations in Treasury Cash Management

November 19, 2004
Note To Editors

The latest edition of the Federal Reserve Bank of New York’s Current Issues in Economics and Finance, Recent Innovations in Treasury Cash Management, is available.

Authors Kenneth D. Garbade, John C. Partlan, and Paul J. Santoro examine three innovations in the Treasury Tax and Loan Program, a joint undertaking of the Treasury and the Federal Reserve designed to manage federal tax receipts and stabilize the supply of reserves in the banking system. According to the authors, the innovations – electronic collection of business taxes, real-time investment of excess Treasury balances, and competitive bidding for Treasury deposits – have materially enhanced the ability of the two agencies to achieve their objectives.

The authors find that electronic collection of business taxes, through a system known as the Electronic Federal Tax Payment System (EFTPS), has reduced the cost of processing business tax payments. In addition, EFTPS has enhanced the return on public funds by reducing the amount of money held overnight in interest-free collection accounts and allowed cash managers to replace imperfect forecasts of some tax payments with data on actual flows. A second innovation, Dynamic Investment, acts as an automatic stabilizer, keeping the Treasury’s Reserve Bank balance closer to target level. The third innovation, the Term Investment Option, has changed the locus of interest rate determination for a portion of Treasury’s deposits to a market-driven process and generated, on average, an additional 17 basis points of yield on such balances.

Kenneth D. Garbade is a vice president in the Capital Markets Function of the Research and Statistics Group; John C. Partlan is a markets officer and Paul J. Santoro a senior financial analyst on the Monetary Projections Staff of the Markets Group.

Recent Innovations in Treasury Cash Management ››

Linda Ricci
(212) 720-6143