Float (Banking) Definition
Float, in the banking system, refers to money briefly counted two times because of the delays in check processing. Float is built as soon as the check is deposited. The customer’s account is credited by the bank. However, the payer’s bank takes some time to send payment on the check. Until the payer’s bank clears the check, the check amount is displayed both in the payer’s and recipient’s bank.
A Little More on What is Float
Because available funds are counted twice, the amount of float in the system effects the money supply by causing inflation and hindering effective monetary policy implementation.
There are certain time periods where float fluctuates. For instance, Float is higher on Tuesday because of checks’ backlog on weekend. The Federal Reserve, based on these trends, forecasts float levels, and to makes monetary policy.
Two types of Federal float have been defined by the Federal Reserve:
• holdover float that occurs due to institution’s delays for processing;
• transportation float that happens due to weather and air traffic issues.
The formula to calculate Float is Float = Firm’s Available Balance – Firm’s Book Balance
You can also measure float as:
Average Daily Float = total check values in collection phase during a specific period / the number of days falling under that period.
Conversely, total check values to be collected is calculated by multiplying a float amount by the number of days outstanding.
For example, if your business has a $15,000 float outstanding for first 14 days of the month, and $19,000 for the last 17 days of the month, then you can calculate the average daily float as:
= [($15,000 x 14) + ($19,000 x 17)] / 31
= ($210,000 + $323,000) / 31
= $533,000 / 31
References For Banking Float
Academic Research on Float
Asset float and speculative bubbles, Hong, H., Scheinkman, J., & Xiong, W. (2006). The journal of finance, 61(3), 1073-1117. In this paper, the authors model the relationship between asset float (tradable shares) and speculative bubbles.
Accounting for the upward float in foreign currencies, Connor, J. E. (1972). Journal of Accountancy (pre-1986), 133(000006), 39. This paper explores the amendment to the dealing in translation of foreign currencies in the U.S, as circulated in the exposure draft by the Accounting Principles Board in 1971. The purpose of this paper is to consider whether present exchange translations methods needs revision, whether revised methods proposed in the exposure draft are appropriate, or whether a better long-range solution can be developed.
Multi-country evidence on the behavior of purchasing power parity under the current float, Lothian, J. R. (1997). Journal of International Money and Finance, 16(1), 19-35. Using panel data for the United States and 22 other OECD countries for the current float, this paper presents evidence that despite substantial short-term perturbations, purchasing power parity actually performed much better than commonly believed.
… Stock Market moving towards Weak-form efficiency? Evidence from the Karachi Stock Exchange and the Random Walk Nature of free-float of shares of KSE 30 Index., Akber, U., & Muhammad, N. (2013). In this study, the authors attempted to seek evidence for weak-form of market efficiency for KSE 100 Index. For further analysis, return series has been divided into sub-periods. The paper has made use of primarily Non-Parametric tests as well as parametric tests. For further analysis, Runs test has also been run on 20 companies return series for comparison purpose with the results of index return series. In addition, from KSE 30 Index, 20 companies return series based on the free-float of shares have also been analyzed.
Seasoned equity offers: The effect of insider ownership and float, Intintoli, V. J., & Kahle, K. M. (2010). Financial Management, 39(4), 1575-1599. This paper examines the rate of increase of seasoned equity offering (SEO) underpricing since the early 1980s. The authors find that effect of insider ownership on discounts is twofold. First, higher insider ownership reduces float, thereby increasing price pressure and SEO underpricing. Second, the greater the percentage of secondary shares offered, the lower the underpricing, suggesting that manager’s pressure banks to reduce underpricing when their personal wealth is at stake. More findings are discussed.
Ownership structure and performance: Evidence from the public float in IPOs, Michel, A., Oded, J., & Shaked, I. (2014). Journal of Banking & Finance, 40, 54-61. This paper investigates whether the post-IPO market performance of IPO stocks is related to the percentage of shares issued to the public, namely, the public float.
Free float and market liquidity: A study of Hong Kong government intervention, Chan, K., Chan, Y. C., & Fong, W. M. (2004). Journal of Financial Research, 27(2), 179-197. This paper studies the relationship between a free float and market liquidity, by analysing the August 1998 Hong Kong government intervention in the stock market.
Examine the relationship between free float of shares and P/E ratio with a price bubble in the companies listed in Tehran stock exchange, Sorayaei, A., Memarian, E., & Amiri, M. O. (2013). World Applied Sciences Journal, 21(2), 170-175. The purpose of this paper is to explore the comparative position of India’s trade with Bangladesh and other SAARC countries for the last ten years. It aims to find out the prospects and challenges of India’s trade with Bangladesh and other SAARC countries.
The fiscal consequences of privatisation: Australian evidence on privatisation by public share float, Harris, M., & Lye, J. N. (2001). International Review of Applied Economics, 15(3), 305-321. Privatisation has become a common government policy in many countries. This paper summarizes the salient features of privatisations by public share float in Australia during the period 1989 to 1997. The costs associated with these privatisations and their impacts are examined.
Empirical tests of the float-adjusted return model, Zhang, F., Tian, Y., & Wirjanto, T. S. (2009). Finance Research Letters, 6(4), 219-229. This paper implements empirical tests of the recently proposed float-adjusted return model by using Chinese stock-market data. The results show that variation in free float can explain cross-sectional variation in asset returns by about 6.7% annually, after controlling for market risk, size, and book-to-market equity.
Demand and supply and their relationship to liquidity: evidence from the S&P 500 change to free float, Lam, D., Lin, B. X., & Michayluk, D. (2011). Financial Analysts Journal, 67(1), 55-71. In the context of the switch to free-float weighting in the S&P 500 Index, this study of the effect of the availability of shares on liquidity in the medium term found cross-sectional differences in liquidity and price impact measures that gradually narrowed following each phase of the free-float adjustment.
The impact of free float shares on the supply and demand in companies listed in Tehran stock exchange, Esmaeilzadeh, A., & Alipanahi, M. (2015). International Journal of Science and Engineering Investigations, 4(38), 12-14. The aim of this study is the impact of free float shares on the supply and demand in companies listed in Tehran Stock Exchange. For this purpose, the information of some companies listed in Tehran Stock Exchange during the years 1388 to 1392 were studied. The panel data technique was used to analysis of the data and information.