WASHINGTON - A congressional proposal that favors external oversight of the Federal Reserve's check clearing business has received cautious approval from big banks and drawn fire from community banks.

It revives a long-standing dispute between correspondent banks providing check clearing services to others and community banks that say the private sector ignores their needs.

Correspondent banks have long argued that the Fed has an unfair advantage in providing check clearing and other services because of its dual role as regulator and service provider.

Competition Growing

The issue is timely because several new private sector payments systems that compete directly with the Fed have been launched in the past two years.

Among these efforts are a bank-run check clearing house organization that was spearheaded by Huntington Bancshares; the Electronic Check Clearing House Organization, or Eccho, a consortium of banks formed to send check information electronically, and the attempts by Visa International and the New York Clearing House Association to create nationwide automated clearing house services.

Representatives from two clearing houses and an executive of CoreStates Financial Corp. testified before the House Banking Committee last week in favor of greater oversight of the Federal Reserve's check clearing business, while the Independent Bankers Association of America testified against any restrictions on the Fed's check clearing.

Gonzalez Bill

The testimony came in response to a bill introduced in January by the committee's chairman, Rep. Henry B. Gonzalez, D-Tex. The bill centers on a proposal to require the heads of the 12 Federal Reserve banks to be appointed by the President and confirmed by the Senate.

However, the bill also has a section that calls for a study of the "feasibility of transferring check clearing services" to the private sector.

"The private sector has demonstrated neither the capacity to absorb the Federal Reserve's check volume ... nor the willingness to provide the services to all segments of the industry," said IBAA president James B. Lauffer. "The private sector initiatives by Visa and Huntington both demonstrate the willingness of the private sector to serve only high-volume users."

Half the Pie

The Fed accounts for about 50% of all interbank check clearing volume, while none of its competitors alone accounts for more than 3% of the volume, according to John P. Borden, president of the National Organization of Clearing Houses, a Washington-based group representing a number of regional check clearing operations.

Some observers say it appears the Fed recently has been slipping changes in pricing through the back door, without submitting them to public comment.

|Major Philosophic Departure'

Recently the Fed approved a district bank's request to offer a service in which the Fed bank charges paying banks a portion of the collection costs for checks presented to it, and offers a discount to the fee it charges collecting banks.

"This is the first time ever the Fed has been charging both the paying bank and the collecting bank; it represents a major philosophic departure, and it was made without benefit of public comment," said Borden.

Also of concern are new posting schedules that mean faster credits for banks that clear through the Fed than for those clearing through the private sector. When the Fed begins to charge fees for same-day credit next April, banks that clear through the Fed - and thus get credits posted earlier - will generate smaller overdrafts and will pay less in fees.

Greater Oversight Sought

Bankers that compete with the Fed say that it is that intertwining of the Fed's regulatory and competitive role that gives it an unfair advantage.

Bily banks felt there should be greater oversight, by the private sector or the General Accounting Office.

"Not only is gradual privatization of the Federal Reserve's check clearing functions feasible and desirable, it is already occurring," said J.D. Carreker, chairman of J.D. Carreker and Associates, a management consulting company. He is also the executive director of Echho.

"The Federal Reserve, while explicitly endorsing the [electronic check presentment] concept, is planning to invest in a different approach ... that will compete with the private sector's investment," he said.

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