Why do bank holidays exist?

Despite mobile banking and 24-hour ATMs, banks don’t operate when the Fed is closed

With the holidays upon us, it’s easy to think about money in some ways—buying gifts, processing payments, sending money to family members (perhaps via Venmo or PayPal)—and forget about it in others. Specifically, in the months of November, December, and January, banks close across the country five times. In other words, half of the United States’ federal bank holidays fall in those three months—arguably the time of year when people rely most heavily on transferring, withdrawing, and spending money.

But with mobile banking and 24-hour ATMs becoming the norm in most consumers’ lives, it’s easy to forget that when banks themselves aren’t open, transactions might take longer than usual. It begs the question of why we have bank holidays in the first place.

Banks are closed on federal holidays because the Federal Reserve, a government agency, is closed. Congress began designating federal holidays in 1870 to grant federal employees paid time off. There are currently 10 federal holidays, which continue to legally grant time off to all U.S. government employees—including those who work at the Federal Reserve. These holidays are New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans’ Day, Thanksgiving, and Christmas Day. If a holiday falls on a Sunday, the Federal Reserve is closed on Monday. (Inauguration Day is also a federal holiday, but it is observed only every four years, including this year, and only in Washington, D.C.)

Though most banks belong to the private sector, and thus are not required to close on federal holidays, most close anyway because the bulk of a bank’s activities rely on the Federal Reserve. For example, banks are becoming increasingly responsible for processing electronic payments such as direct deposits for payroll, online bill payments, insurance payments, loan and mortgage payments, mobile check deposits, and peer-to-peer transactions. These types of transactions all use the Automated Clearing House (ACH), which is an electronic network that transfers funds from one bank account to another at any bank in the country. Banks gather information about initiated ACH transactions() throughout the day, and at predetermined times they send the information to the Federal Reserve to be processed, sorted, and cleared. From there, the Fed sends the information to recipients’ banks, where funds are deposited in their accounts. Last year, more than 24 billion transactions were made using ACH.

But when the Federal Reserve is closed, these transactions bottleneck in the middle of their journey from one bank to another. This delays the amount of time it takes for a check to clear, for payroll to get deposited in an employee’s account, or for a Venmo transaction to show up as usable funds. ACH transactions can take up to four business days to clear on a normal basis. Same-Day ACH, introduced earlier this year, enables banks to clear most ACH credit transactions the same day they’re initiated, which has been a boon for direct deposits and bill payments. Relying on Same-Day ACH to pay a bill, for example, won’t get you very far if you initiate the transaction on December 25. (It will clear on the following business day instead.)

Similarly, wire transfers—which do not rely on the ACH network—are routed through the Federal Reserve and cannot be made on bank holidays.

Some bank branches do not close on all federal holidays. For instance, some banks such as Chase, Wells Fargo, and others stay open on Columbus Day. Even though some transactions such as account withdrawals or loan applications can be made, those that rely on the Federal Reserve still cannot and are delayed until the next business day.

On the other hand, some banks are also closed on holidays that are not considered federal holidays, because they follow the New York Stock Exchange schedule, which adds a few more days to the mix. For instance, some banks close on Good Friday, and others limit the number of services available on NYSE holidays. Moreover, state holidays may also contribute to bank closures.

Indeed, bank holidays themselves are not set in stone. In 1933, 36 hours after being sworn in as the president, Franklin Roosevelt suspended all banking activity nationwide, ultimately declaring a week-long bank holiday during which people could not withdraw or transfer money or deposit paychecks or any other funds. In the wake of the Great Depression, people were still panicking about money, and banks’ reserves of gold were falling at unsustainable rates. FDR’s decision was intended to quell a growing crisis, and he figured that if people simply didn’t have access to banks for a while, they would feel calmer about their situations. And it worked. When most banks resumed operations a week later, deposits far outnumbered withdrawals, and an equilibrium was largely restored.