Will the Fed Get Out of Check Clearing?
Currently, the Federal Reserve System is the world's largest check clearing and payment system even though it handles only 25% of U.S. checks. But, the Fed could be looking to get out of check clearing altogether.
If you've read our 1997 Check Study, you already know a few facts about the Federal Reserve and check clearing, such as:
1. The Fed's main function since its inception more than 80 years ago has been check clearing.
2. The number and value of Federal Reserve check clearings are on the decline, while private clearings are increasing.
3. The federal mandate to eliminate checks written by the federal government before the end of 1999 will further reduce the number of checks cleared by the Federal Reserve System.
4. In early 1997, Senior Federal Reserve officers were reported to be considering ceasing the Fed's check clearing operations.
All of these facts combined with a new bill introduced by the House Banking and Financial Services Committee may force the Fed to question the viability of their check clearing operations.
"The Efficient Check-Clearing Act of 1997" was introduced in July. Currently the Fed provides financial services to the public sector under the Monetary Control Act of 1980. This act requires the Fed to recover the overall cost of its financial services. It does not require the Fed to match individual costs to the fees they collect for individual services. The new bill asks for the stand-alone recovery of all check transportation costs, "prohibiting the Fed from subsidizing the transportation of paper checks." According to an unnamed Fed source, "If the Fed were forced to fully price every single service, this could affect every area where the Fed operates. We'll probably get out of the check clearing business all together."
According to Carolyn Maloney, the bill's author, "The Fed should not subsidize the transportation of paper checks." Alan Greenspan, Federal Reserve Chairman says, "... for check services, as a group, we have recovered all (costs)" and the Fed actually made a profit of about $1 billion over the years. But Maloney says the Democrat minority prepared a report which documents that the costs were subsidized, including chartering 60 planes for paper check transport.
