ÿþ<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN"> <html> <head> <title>A Central Bank Cash Wholesaling Model</title> <meta http-equiv="Content-Type" content="text/html; charset=iso-8859-1"> <meta name="description" content=""> <meta name="keywords" content=""> <meta http-equiv="Content-Language" content="en-us"> <script language="JavaScript" type="text/javascript" src="script/mouseover.js"></script> <script language="JavaScript" type="text/javascript" src="script/top_popup.js"></script> <link rel="stylesheet" type="text/css" href="css/content_style.css"> </head> <body> <div id="NAV"> <div id="blackbar">&nbsp;</div> <p style="padding-left:12px; padding-top:12px;"><a href="sc02_home.html"><img src="GUI/logo_sml.gif" border="0" alt="Note Printing Australia" width="231" height="85"/></a></p> <p style="padding-top:23px; padding-left:40px;"> <a href="about_NPA.html"><img src="GUI/about.gif" width="166" height="22" alt="About NPA" border="0"/></a><br> <a href="banknotes.html"><img src="GUI/banknotes.gif" width="166" height="20" alt="Banknotes" border="0"/></a><br> <a href="passports.html"><img src="GUI/passports.gif" width="166" height="22" alt="Passports" border="0"/></a><br> <a href="presentations.html"><img src="GUI/presentations.gif" width="166" height="20" alt="Presentations" border="0"/></a><br> <a href="links.html"><img src="GUI/links.gif" width="166" height="22" alt="Links" border="0"/></a><br> <a href="contact_us.html"><img src="GUI/contact_us.gif" width="166" height="21" alt="Contact Us" border="0"/></a><br> <a href="policies.html"><img src="GUI/policies.gif" width="166" height="20" alt="Policies" border="0"/></a><br> </p> </div> <div id="CONTENTS"> <h1>Reports &amp; presentations</h1> <h2 class="textHead">A Central Bank Cash Wholesaling Model</h2> <small>Author: Brian Lang, Chief Manager, Currency and Building Services, The Reserve Bank of New Zealand</small> <br><br> <p><b>(Compensatory payments to commercial banks as an alternative to notes held in trust schemes)</b></p> <p>On February 1st this year the Reserve Bank of New Zealand Currency Department completed its transformation into what we call a "wholesale model" in supplying cash to the commercial banks.</p> <p>I will briefly summarise why we decided to change our role, how we went about it, and the results to date.</p> <p>Traditionally in New Zealand the Central Bank has been very much part of the "retail" cash distribution process. We had very few restrictions on the banks depositing and withdrawing cash from one of our three storage and processing sites.</p> <p>These arrangements proved very convenient for the commercial banks, allowing easy redistribution between the cash positive and cash negative banks. It also provided an opportunity for the Central Bank to check the notes in circulation for forgery and quality.</p> <p>However, it is a costly process. For the Central Bank it requires the maintenance of multiple sites, and for the commercial banks, the costs and risks of transporting their notes to and from these sites.</p> <p>Initially we considered setting up Central Bank "agencies" or a "notes held in trust" system as a way of decentralising the cash distribution process. In these models the notes remain on the Central Bank's balance sheet, together with the inherent risks (reputation as well as possibly financial). It also requires administrative cost (for example; keeping the inventory records; ensuring the sites are secure; auditing the stocks). </p> <p>In reality the main purpose of a Central Bank "agency" or "notes held in trust" system is to "fund" the excess note holdings of the commercial banks, i.e. notes that are not required on any particular day by the general public or their own branches and ATM networks. We decided that the most efficient way of providing this "funding" was by a compensatory payment rather than the more complicated process of changing ownership of the excess bank notes.</p> <p>An examination of the cash flows between the Reserve Bank and the commercial banks in New Zealand revealed that the maximum net flow on any particular day, apart from around the Christmas and Easter period, was never greater than 10% of the total holdings of all the banks.</p> <p>We thus agreed with the banks that we would compensate each bank for 10% of their cash holdings on a daily basis. The compensation would be based on the Reserve Bank's "official cash rate" and would be paid on a monthly basis. </p> <p>At present each bank sends us a monthly return listing the value of their cash holdings on each day of the month. Using our OCR rate we calculate a daily compensatory payment and direct credit the bank for the total for the month. The process is very simple and takes just a few minutes each month. </p> <p>Other significant changes we have made in recent months are as follows:</p> <ul> <li>The Christchurch Branch was closed in June 2000.</li> <li>The Auckland Branch was closed in November 2000 (leaving Wellington Head office as the sole Central Bank site).</li> </ul> <p>From February 1st 2001 the following occurred:</p> <ul> <li>The Reserve Bank now only accepts repatriations of unfit notes on a pre-arranged basis. Repatriations of fit notes will be permitted during the month of January and the two weeks after Easter in minimums of $100,000. </li> <li>The Reserve Bank now makes fit notes available for issue, but only on one set day a week in minimum orders of $1 million. Daily orders will be permitted during the month of December and the two weeks prior to Easter.</li> </ul> <p>The objective of the above procedures is to encourage the commercial banks to buy and sell bank notes among themselves. The Central Bank's role is to provide an avenue for the return of unfit notes and the provision and return of notes from reserve stocks to cover the busy Christmas and Easter periods.</p> <p>Initially the commercial banks in New Zealand have struggled a little to cope without the Reserve Bank's centralised distribution role. Cash holdings of the commercial banks are running at higher levels since we closed our branches. Part of the problem is that the banks have split into two competing factions, with one group comprising cash negative banks and the other group the cash positive banks. </p> <p>It is interesting to note however, that the commercial banks in New Zealand have readily accepted the logic of the Reserve Bank's change to a wholesale model. The banks believe that, given time, they will sort out their distribution networks and will also gain some efficiencies from a decentralised approach. In the meantime we have agreed with the banks to review the level of the compensatory payment in the middle of this year.</p> <p>A leading question from my Central Bank colleagues may well be& "does the wholesale model allow us to meet our statutory obligations with regard to the issue of currency".</p> <p>We see our key functions as design and procurement; the holding of reserve stocks; the provision of circulating notes and coin in the quantities demanded by the public; the destruction of unfit notes and coin; and maintaining the integrity of the issue.</p> <p>Despite the significant downsizing in the numbers of staff involved in the currency function at the RBNZ, we have maintained the issue of notes and coin as a core group within the organisation, with a direct reporting line to the Governors. This will enable us to maintain the expertise for design and procurement.</p> <p>The closing of our branches does raise an issue with regard to the storage of reserve stocks, (particularly once the Auckland branch building is sold). However, we are looking at a number of options, including a long-term lease of one of the vaults in Auckland. </p> <p>The provision of adequate supplies of cash to the general public is assisted by our part funding of the cash holdings of the banks and once a week wholesale issues, (daily pre Christmas and Easter).</p> <p>The key Central Bank functions, in a wholesale operating model, of maintaining the integrity of the note issue and destruction of unfit notes, we believe, is very greatly assisted by the fact that most of the bank notes currently in circulation in New Zealand are now polymer. This has been crucial in providing the catalyst in promoting our cash distribution changes.</p> <p>Our first polymer bank note was introduced into circulation in May 1999 and the final denomination was converted to polymer in March 2000.</p> <p>A public opinion survey undertaken late last year by AC Nielsen (NZ) Ltd, reveals that 74% of the general public and 90% of retailers prefer or strongly prefer polymer rather than paper notes.</p> <p>Ninety per cent of the general public and 100% of retailers agree that polymer notes are cleaner and retain quality longer than paper.</p> <p>Fifty-four per sent of the general public and 65% of retailers perceive that polymer notes are more difficult to handle than paper; but, most importantly 75% of the public and 85% of retailers still give a positive rating to polymer for ease of handling.</p> <p>Since the introduction of polymer notes we have detected only two attempts at counterfeiting the polymer design (both attempts were on a paper substrate). It is interesting to note that in December 2000 we discovered only 7 forgeries (all paper notes) compared with 80 in the same month in 1999.</p> <p>In terms of durability, while it is early days, recent machine throughput figures show very encouraging trends. The latest reissue rates are as follows:</p> <table width="100%" cellpadding="3" cellspacing="0" border="0"> <tr> <td>&nbsp;</td> <td>$5</td> <td>$10</td> <td>$20</td> <td>$50</td> <td>$100</td> </tr> <tr> <td>Polymer:</td> <td>94.6%</td> <td>97.7%</td> <td>99.1%</td> <td>99.3%</td> <td>98.4%</td> </tr> <tr> <td>Paper</td> <td>68.9%</td> <td>82.7%</td> <td>95.6%</td> <td>92.2%</td> <td>90.3%</td> </tr> </table> <p>In New Zealand our $20 note is the default note in ATM's and is thus the most popular, making up about 54% of all notes on issue. This denomination accounts for about 45% of our annual printing costs and 70% of the throughput at the Bank.</p> <p>The greater durability of polymer is already clearly apparent with the $20 denomination, which has been in circulation for 22 months. Our paper $20 note had an average life of 19/20 months and our current estimates show that the average life of our polymer $20 will likely be five times that figure. </p> <p>The polymer $20 is also proving very efficient for the bank's ATM networks. Two of our larger commercial banks are recycling polymer $20's into ATM machines without machine processing. Orientation does not seem to be a problem and many times I have received cash from an ATM with the notes out of orientation.</p> <p>The other commercial bank's service providers are machine processing notes using our ex branch machines that we have leased to them, basically at no cost but with a requirement to maintain regular servicing. Although there is currently no counterfeiting or quality problems, we are encouraging the use of processing machines by the cash in transit companies as this will assist us in detecting any very good counterfeits that may occur in the future. We will also continue to machine process all notes returned to us.</p> <p>At this stage we are not allowing destruction of unfit notes by the cash in transit companies using our ex processing machines. However, we are giving their client banks same day value for any unfit or suspect notes detected and we are paying for the return of those notes to the RBNZ. All other unfits detected at bank branch level are transported to the RBNZ at their cost and for value when received.</p> <p>One of the main reasons for not allowing destruction by the cash in transit companies is the same as not entering into agency type arrangements. There is a cost (and some risk) in ensuring the service provider's sites and processes are secure. In addition the number of unfit polymer notes being detected is so low at the present time that returns to the RBNZ are occurring only at infrequent intervals and for relatively small amounts. Thus, the costs of return are not significant for the banks. </p> <p>It is clear that our ability to maintain the integrity of the note issue without a 'retail' processing involvement is made significantly more viable with polymer notes in circulation, because of the difficulty in counterfeiting and the longer life of the notes. </p> <p>The cost saving to the Central Bank of our wholesale cash model and issuing polymer bank notes is very significant. Our average expenditure on currency operations over the past five financial years has been in the order of NZ$15 million per annum. In the 2000/2001 June financial year the budgeted expenditure for the function is $12 million. In 2001/2002 we would expect this to be further reduced to about $8 million, a saving of $7 million or 47% per annum.</p> <p>Our bank note issue expenses has averaged around NZ$5 million per annum in recent years. Our projected expenditure over the next three years is just $0.5 million per annum. This includes allowing for a continued growth of around 8% per annum in the value of notes held by the public. In conclusion the Reserve Bank of New Zealand is currently extremely satisfied with our move to polymer bank notes. They are popular with the general public and retailers; they have virtually eliminated forgeries; our annual note issue expenses are significantly reduced; they are proving very efficient in machine dispensing and processing; <b>and they have provided the catalyst to introduce a "wholesale model" for our cash operations.</b></p> <br> <b><a href="presentations.html">back to list</a></b> <script type="text/javascript" src="script/footer.js"></script> </div> </body> </html>