Flow of Funds
The U.S. Treasury receipts from taxes and the sale of securities now
total well over $2,500 billion a year. Almost all of that comes
of the bank deposits of taxpayers. Banks must cover those
with their own reserves on deposit at the Fed, but bank balances at the
Fed total less than $25 billion. How can banks manage such a
flow of funds on so little reserves?
Treasury Tax and Loan
The answer is that the Treasury spends on average as
Its spending replenishes banking system reserves about as fast as they
are used. However there can be significant short-term imbalances
between inflows and outflows. Banks would be in trouble if the
made no provision for those imbalances. That is the principal
of the Treasury Tax and Loan (TT&L) program.
All tax payments by individuals and businesses go into
at depository institutions called TT&L accounts. Government
however, is paid out of the Treasury account at the Federal
The Treasury must therefore replenish its Fed account with frequent
from its TT&L accounts.
Payments deposited in TT&L accounts cause a transfer
reserves within the banking system but do not change the total.
However when TT&L deposits are moved to the Treasury's account at
the Fed, banking system reserves decrease accordingly. By
targeting a constant balance in its Fed account, nominally $6 billion,
the Treasury helps to maintain the reserves of the banking system at a
nearly constant level. This is key to enabling the Fed to
maintain control of the Fed funds rate, its primary monetary policy
The Role of Depository
A depository institution can participate in the TT&L
any of three ways: as a collector, retainer, or investor
institution. Collector institutions act as tax collection
They accept tax payments from businesses, and transfer the payments to
Treasury accounts at district Federal Reserve Banks.
A retainer institution also accepts tax payments, but
in an interest-bearing "Main Account" until called for by the
If the Main Account balance exceeds the institution's balance limit or
if it exceeds the collateral value of assets pledged by the
the rest is transferred promptly to a Treasury account at the district
Federal Reserve Bank.
An investor institution does everything a retainer
and also accepts discretionary investments from the Treasury.
investments are credited to the institutions Main Account, and must be
collateralized. They pay interest to the Treasury at the weekly
overnight federal funds rate, less 25 basis points.
Tax Collection Methods from
The taxes paid by businesses
witholdings of personal income taxes, corporate income taxes, and
security contributions. The Treasury now uses two mechanisms to
these taxes: The Paper Tax System (PATAX), and the Electronic Federal
Payment System (EFTPS).
In the PATAX system, a business
tax payments by preparing a federal tax deposit coupon and
the coupon and the check to its depository institution. Upon
the institution debits the customer's checking account and credits an
Treasury tax collection account. The depository institution must
pledge collateral to cover any balances that exceed its insurance
The following day, the balance in the account is transferred to a
Reserve bank if the institution is a collector institution, otherwise
the Main Account in the same institution.
A business enrolled in the EFTPS
by authorizing, by telephone or computer, withdrawal of the payment
its account at a participating depository institution on a specified
date. On the payment date, the funds are transmitted to a
Treasury account at a Federal Reserve Bank via an automated
If the participating institution is a retainer or
with sufficient free collateral and room under its balance limit to
additional funds, the payment is immediately routed back to the
Main Account. EFTPS was first required for large business
in the fall of 1996. Subsequently it became mandatory for any
making more than $200,000 in aggregate annual tax payments.
Stabilizing Treasury Balances
In July 2000, the Treasury and the
the Treasury Investment Program (TIP), a major revamping of the
infrastructure that centralized at the FRB St. Louis many of the
previously carried out by the individual Federal Reserve Banks.
consolidated functions include tracking Main Account balances,
collateral, and investing and calling Treasury balances.
TIP now allows Treasury cash managers to monitor many
on a nearly real-time basis and thus reduce the errors in maintaining
Treasury balance at the Fed. This in turn reduces the amount of
market operations the Fed must conduct to hold the interbank lending
(Fed funds rate) on target.