Transfer to the FR
The FR receives the shipment of FRNs from the BEP and pays the BEP the cost of production. This is a simple sale (an income-statement transaction). The new FRNs are placed in a vault and held as stock at $0 value before the next step, in which the FRNs are given their face value as they are transferred to commercial banks.
Transfer to Commercial Banks
A FR bank processes an order for a certain delivery of, say, $1000 cash (FRNs) to a member commercial bank, Bank A. Bank A receives the ordered FRNs in exchange for the face-value amount ($1000) drawn from its reserve account on deposit at the FR. At this point the FRNs become cash, legal tender at face value (because there has been a face-value payment for these notes). Bank A's reserve account at the FR (an asset of Bank A) is drawn down by the FR to pay for the order, and the bank's cash on hand, an asset, is credited by the face value of the received FRNs on the bank's balance sheet. Since there have been no net changes to the asset or liability sides, the bank's balance sheet is balanced.
The FR Bank's balance sheet now shows an increase in the FRN collateral account, a liability account, acknowledging the obligation to redeem the delivered FRNs at face value. Bank A's FR Reserve account, a FR liability, has been drawn down by the same amount in payment for the transferred FRNs, and thus, the FR Bank's balance sheet is balanced.
Insertion into circulation
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