The Federal Reserve plans to make it more convenient for banks to process checks through clearing houses, Fed Governor Edward W. Kelley Jr. said Tuesday.
"I expect that there will be good progress to report on these issues relatively early next year," Mr. Kelley said in a wide-ranging speech to the National Automated Clearing House Association.
Mr. Kelley declined to give details of the Fed's plan for check- settlement systems, known as Fed Wire-based net settlement services. But Nacha president Elliot C. McEntee said the Fed is considering giving clearing houses greater control over the process.
Currently, clearing houses sort through each day's checks to determine how much member banks owe each other. The banks then order money from their Fed accounts be used to settle their debts.
Mr. McEntee said the clearing houses want to order the transfers themselves, eliminating the need for each bank to contact the Fed. This would avert delays caused by occasional computer problems at banks, he said.
The Fed is examining what type of computer changes and risk management policies would be needed to adopt the plan, Mr. McEntee said.
In his speech, Mr. Kelley also said that clearing houses specializing in checks and other retail payments should adopt automated risk management systems. He noted that these institutions traditionally have been subject to less stringent controls than clearing houses that handle higher-value wholesale payments.
"The vast majority seem to take the approach that, if anything goes wrong, clearing house participants will take two aspirin and settle in the morning," he said.
That attitude is no longer acceptable, Mr. Kelley said. Banks and clearing houses must consider the amounts at risk and who the counterparties are, he said.
"I would urge that all banking organizations take these retail operational risks seriously and act with great prudence in evaluating and managing them," he said.
Finally, Mr. Kelley questioned why some clearing houses still use next- day settlement - meaning that member banks get their funds the morning after checks are sorted.
"These conventions are obsolete," he said, "and improvements are possible."