The Federal Reserve Board on Thursday dropped a controversial plan to shorten maximum hold times on certain checks by one day.
After a torrent of opposition from bankers, the Fed decided that "the costs and potential risks of shortening holds on all or some nonlocal checks would outweigh the likely benefits."
In December, the Fed proposed reducing to four business days the time financial institutions have to make funds available on nonlocal checks. These are checks that cross the boundaries separating the 12 Federal Reserve Bank districts.
More than 90% of the 125 comment letters received by the Fed's March 15 deadline dumped on the idea. Many bankers argued that just because it may be physically possible to clear most checks across regions in less than five business days, it is more important to mitigate losses. The fifth day helps bankers to deal with items returned unpaid, said Nessa Feddis, senior federal counsel of the American Bankers Association in Washington.
"This would have increased fraud-that's the bottom line," she said.
The Fed proposed the change because its research showed that in 1997, nearly 60% of nonlocal checks were being cleared within four business days. The central bank noted that the legislative history of the 1987 Expedited Funds Availability Act suggested the Fed should reduce check clearing times as technology improves.
Viveca Y. Ware, director of payment systems for the Independent Community Bankers of America, applauded the Fed's decision to back off. She said reducing hold times would hamstring bankers' efforts to combat check fraud.
Checks deposited to open new accounts or those large enough to raise suspicions require the extra processing time, said Edward Hill, director of regulatory affairs at the Financial Services Roundtable. "That extra day makes a big difference," he said.
The rising popularity of electronic banking will reduce hold times without regulatory fiat, the Roundtable said in its comment letter. "Electronic check presentment will undoubtedly help to speed up the check return system and reduce the need for longer hold periods."
Ms. Ware said the majority of community banks grant next-day availability on all checks. The maximum-hold rule is invoked "in instances where the bank is unfamiliar with the customer or is suspicious of account activity," she said.
The Fed's proposal also explored the possibility of defining "subcategories" of nonlocal checks and using them to determine hold times.
Opposition voiced in the comment letters put that idea to rest, the Fed said. "It was not clear ... what would be the most reasonable and cost- effective way to identify those subcategories of nonlocal checks that should receive earlier availability," the agency said.
Clearing times are spelled out in the Fed's Regulation CC. Banks, thrifts, and credit unions must process local checks, or checks originating and terminating in the same Fed district, in two business days.
