What are Holdovers?
When you receive a check, you deposit it with a bank to transfer it to your account. From the time it is deposited to the time it is transferred to the account, it is a holdover check. Checks are the most common type of holdover transactions.
Causes of Holdover Transactions
Holdovers may occur due to a number of reasons. They may include:
- The bank or the clearinghouse might have received too many checks for the day and cannot process them the same day.
- Checks deposited late cannot be processed on the same day due to the time taken from deposit to clearing.
- A large number of checks deposited at once might be held for next-day clearing due to operational reasons.
- Extra verification might be required for some high-denominated checks.
- Technical and legal issues may also lead to the creation of such floats.
Holdovers are not a common phenomenon and are a rare occurrence at an individual bank or a financial institution.
Impact of Holdovers
Holdover transactions create what is known as the “holdover float.” Holdover float is the condition in which the money can exist in the account of the debtor, as well as the creditor at the same time.
Holdover float is dealt with differently by different banks. Some of the ways the banks manage them is to:
- Create a temporary debit with the same amount against the account in which the checks are to be deposited. The temporary account is deleted when the checks are finally processed.
- Ask customers to sign an agreement mentioning the causes of such holdover.
- Not allowing holdovers by undertaking next-day processing and informing the concerned parties about the same.
Holdovers are a risky proposition as the checks might not be honored due to a number of reasons. Therefore, banks take significant care while allowing holdovers. The best way to do so is to take heed of the credit risk of the customer. A customer with a good credit rating/quality can be allowed a holdover.
Holdovers may be rare at a single bank, but when seen from the perspective of a complete financial system, they are compounded. The volume of such holdovers becomes large enough that they cannot be ignored.
Holdover float at the Federal Reserve is the sum total of the float caused as a result of delays across the United States. It is more pronounced in December and January because of increased transactions and employees taking holidays.
A less pronounced effect takes place on Tuesday, which is a backlog of Monday clearing due to the increase in transactions after the weekend.
There are certain benefits for financial institutions as a result of the holdovers. They get free funds for the time the payment is under holdover. However, such a practice provides an opportunity for misuse as the institutions may still hold over checks even if there are no operational bottlenecks. As a result, the government included certain provisions in the Monetary Control Act of 1980.
Some of the measures undertaken and the change in banking policies and practices over the decades led to a reduction in float. The reasons include:
- Federal Reserve charging banks for the float, which leads to reduced float as it is now costly
- The introduction of scannable check technology, which reduced processing time
- Increasing use of electronic fund transfer, which is processed automatically and hence is much faster
- Use of electronic checks as per the Check Clearing for the 21st Century Act, which allows for much faster processing as the checks do not travel between the banks.
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