A Depository Institution's Optimal Currency Supply Network Under the Fed's New Guidelines: Operating Policies, Logistics, and Impact

The overuse of its currency processing operations by depository institutions (DIs) has motivated the Federal Reserve (Fed) to propose new currency recirculation guidelines. The Fed believes that DIs should play a more active role in recirculating fit (i.e., usable) currency so that the societal cost of providing currency to the public is minimized. The Fed characterizes the overuse by the extent of cross shipping, a practice in which the same DI deposits and withdraws currency of the same denomination within five business days in the same geographic region. The Fed's proposal encourages DIs to fit sort and reuse deposited currency through two components: a custodial inventory program and a recirculation fee that would be charged on withdrawals of cross-shipped currency. Given the geographical network of the various branches of a DI, the extent of its participation in the proposed programs depends on a variety of factors: the nature of demand and supply of currency, number and locations of the processing centers, and the resulting fit-sorting, holding, and transportation costs. The interrelated nature of these decisions motivates the need for an integrated model that captures the flow of currency in the entire network of the DI. Based on our work with Brink's Inc., a leading secure-logistics provider, we develop a mixed-integer linear programming (MILP) model to provide managers of DIs with a decision-making tool under the Fed's new guidelines. Broadly, we analyze the following questions: (i) Over all typical practical realizations of the demand for currency that a DI may face, and over all reasonable cost implications, is there a menu of "good" operating policies? (ii) What is the monetary impact of fit-sorting and custodial inventories on a DI? and (iii) To what extent will the Fed's new guidelines address its main goal, namely, a reduction in the practice of cross shipping by encouraging DIs to recirculate currency?.