LeoGlossary: Vault Cash

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What is Vault Cash?

The amount of physical legal tender that a depository institution keeps on it. It is made up of banknotes and coins. This is the cash holdings of the bank.

It is part of the money that makes up the bank reserves. There are certain reserve requirements as put in place by regulation. Fractional reserve banking provides that only a certain amount of deposits has to be kept as liquid assets.

Vault cash is used to meet the daily cash needs of a bank's customers. This can include check cashing, ATM service, and cash withdrawals.

The average end-of-day holdings of vault cash over the computation period can be used to satisfy some or all of an institution's reserve requirement in the corresponding maintenance period.

Diminishing Importance

The financial system changed a great deal over the last 100 years. A century ago, most transactions were done with physical instruments. This was commonly checks and banknotes.

Banks have been a centerpiece of society for centuries. One of the primary services it provides was storing of cash in the vault. This was true in England during the early modern era and the sprouting towns of the Wild West in the 1800s.

It is easy to see how banks were counterparty to the transactions for the financial network. Money stored in the bank was viewed as safer than under a mattress.

Vault cash was vital since most of the financial system was based upon this.

The expansion of the electronic age, moving into the digital, meant that the monetary system changed. This paralleled the transformation of financial transactions. Settlements were no longer done with cash.

We saw the transformation to ledger based money. Fractional reserve banking also enabled the banking system to take control of the money supply. Central bank money are banknotes and reserves. The latter is not legal tender nor does it directly enter the economy.

Commercial banks are able to offer out loans. This is credit, something that many do not consider to be money. The challenge with this view is that the currency created through by making loans ends up deposited in banks.

Paper Currency And Metal Coins

Countries legal tender includes money made out of paper and metal. This is what gets stored in vaults of banks.

The paper currency and metal coins that are in possession of the banks are not considered to be part of the circulating supply since it is not held by the consuming public.

This means it is not considered part of a nation's money supply. It is part of the monetary base which is different than the typical money aggregates.

Bank holding show the transformation that money made. Vault cash is generally less than 1% of a bank's total assets and about a third of bank reserves.

The amount of paper currency also far outpaces the coinage that is issued.

Financial institutions are not fond of physical currency. It is difficult to deal with, slow to transfer, and requires physical structures to store. Personnel are also needed to handle the currency.


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