WASHINGTON - The Federal Reserve Board is working with industry groups on legislation that would make it easier for banks to process checks electronically, Fed Vice Chairman Roger W. Ferguson Jr. said Monday.

"A draft Check Truncation Act is being developed under which banks would have the option of truncating some or all of the checks they process," Mr. Ferguson said in a speech Monday at an Independent Community Bankers of America conference.

Under the bill, banks could make electronic copies or machine-readable substitutes of deposited checks and send them to the check writer's bank electronically. The check writer's bank could then print a hard copy of the check to settle the transaction and to send to the customer. Electronic versions and printed copies would be "the legal equivalent" of the original, he said.

"I certainly recognize the irony of the proposed act creating a new paper document - a substitute check - to promote electronics," Mr. Ferguson said. The bill, however, "would remove the barrier to expanded electronic processing resulting from the requirement that banks enter into extensive … agreements with other banks for electronic processing."

The bill would not require banks to truncate checks or to share them electronically. Mr. Ferguson did not say whether the Fed has found a sponsor or when the bill would be introduced in Congress.

Viveca Ware, director of payment systems at the community banker group and a member of an industry group advising the Fed on the bill, said she expects draft legislation will be ready by fall, when the group will start looking for a congressional sponsor.

Senate Banking Committee Chairman Phil Gramm has been informed that the Fed is working on the bill, but will not take a position on it until he sees a final draft, a spokeswoman for the Texas Republican said. A spokeswoman for House Financial Services Committee Chairman Michael G. Oxley did not return calls.

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