Bank Note Inventory
Current Policy
As a monopoly supplier of a product that is widely used in the community on a daily basis, it is considered prudent to maintain a reasonable inventory to meet not only normal demand, but also to be able to meet unexpected demand in the event of a run on cash, precipitated by a natural disaster or loss of confidence. We also need to take into consideration that our bank notes are manufactured overseas, so our ability to obtain supply in a short timeframe is limited.
Our current bank note inventory policy is to maintain in reserve at least 50% of the value of each bank note denomination in circulation throughout the year. The exception is the relatively short peak in demand around Xmas when our inventory will fall to around 25% of the value of notes in circulation.
On current figures for notes in circulation, a reserve of 50% for all denominations equates to $1.4 billion or $1,000 per household (assuming 1.4 million households) or about $1,400 per household if the normal holdings of the banks are included.
Bank Note Holdings
As at 31 August this year the following bank notes were held at the RBNZ and in the community:
|
RBNZ |
Bank Branches |
ATM's |
Cash Centres |
Total Available |
Total Held by Public/Business |
|
$1,000 mil |
$100 mil |
$300 mil |
$150 mil |
$1,750 mil |
$2,500 mil |
At present, our actual inventory holdings are 42% of the value of notes in circulation, but this ratio will improve with the arrival of our 2005 printing order. By early December, the value of our note holdings will be about 70% of the value of notes in circulation.
Policy Review
As part of the Bank's business continuity planning it was decided that our reserve inventory of bank notes should be increased to 100% of the value of notes in circulation. Of particular concern was the potential for a run on cash in the early stages of a flu pandemic when uncertainty and concern in the community might take hold. The projected length of the disruption caused by a flu pandemic (6 to 12 months) was a factor to be considered.
To achieve an inventory level of 100% of the value of notes in circulation we have ordered an additional 55 million bank notes.
Currently each year we are replacing about 17% of notes in circulation as well as satisfying a further 6% growth in demand. The doubling of the inventory under normal circumstances will provide a two year supply buffer. There are no foreseeable events that would require us to write off significant numbers of unissued notes, as these would only occur if we were to make a major change to size, design or substrate. A change of Monarch or Governor would not require write-offs of existing stock.
Conclusion
- A policy of maintaining inventory equal to at least 100% of the value of notes in circulation is considered the prudent option for the Bank in the foreseeable future. The ongoing threat of an earthquake and the newer threats of terrorism and a potential flu pandemic provide good grounds for taking a conservative line; particularly as production is sourced entirely from overseas.
- If the threat of a pandemic passes then stock levels can be reduced over time through the withdrawal of unfit notes and the satisfaction of normal growth in demand. On the other hand if an abnormal number of notes are issued then they will be able to be reissued at a later date (i.e. the expensing of these notes will just be brought forward).
- In the short-term the Bank is fortunate in that the combined 2004/05 note printing order was higher than necessary under the current reserve policy because of the need to order $50 and $100 notes in economic quantities. This will result in the reserve inventory reaching 70% of notes in circulation by the end of November 2005.
