New regulations governing check clearings are expected to give banks a powerful economic incentive to curtail their use of Federal Reserve services, bankers and consultants said.
The new check clearing rules, which were approved by the Federal Reserve Board on Sept. 30 and are slated to take effect in October of next year, are expected to make it more expensive for many banks to use Fed check clearing services and will make private check clearing systems cheaper and more secure.
The rules "kind of come together to create an incentive to move to the private sector," said Phyllis Meyerson, senior consultant at J.D. Carreker & Associates Inc., Dallas.
35% of Market to Fed
Now, according to Florence Young, assistant director of the Fed's operations and payment systems division, only 35% of the interbank check clearings in this country are handled by the Fed.
The rest are handled privately by regional clearing houses or through bilateral arrangements between banks.
In the future, the Fed is expected to get more competition from recently formed national systems for check clearing, such as the Electronic Check Clearing House Organization, known as Eccho, and Chexs, a national clearing house being launched by Huntington Bancshares, Inc., Columbus, Ohio.
The Fed's share of check clearings has fallen steadily since it began charging for these services in 1981, Ms. Young added.
One of the new rules calls for more frequent posting of debits and credits resulting from check clearings handled by the Fed.
This rule is intended to help the Fed minimize daylight overdraft risk by forcing banks to include check clearings in their tabulation of average intraday overdrafts.
Now when the Fed clears checks it posts net credits to banks' reserve accounts in the morning and net debits at the end of the day.
The effect is to limit a bank's intraday overdrafts, also known as "daylight overdrafts," with the Fed.
No Netting Under New Rules
But under the new rules, there will be no netting. Instead, each check debit will be posted against a bank's Fed account within an hour of check presentment, starting at 11 a.m., and check credits will be spread throughout the day.
By receiving debits earlier, and credit later, many banks will see their daylight overdrafts increase.
Fed officials estimate that the average daily increase could total $15 billion, if banks don't change their behavior.
Lure of Private Systems
But in order to avoid an increase in daylight overdrafts, some banks will be encouraged to move some check clearings to private systems, operations experts said.
In private systems, banks can craft simpler check clearing procedures that have little or no affect on daylight overdrafts, argued Ned Miltko, senior vice president of Littlewood, Shain & Co., a bank consultancy in Exton, Pa.
Mr. Miltko is an interested party. His consulting firm is helping Huntington launch its a private check clearing system.
But other bankers, who asked not to be named, agreed with Mr. Miltko's assessment. They added that Huntington would not be the only bank to benefit.
Same Day Settlement
The second rule, requiring banks to expedite settlement of checks cleared outside of the Fed system, addresses an issue that operations experts call same-day settlement.
Currently, the Fed can wait until as late as 2 p.m. to present a check to a paying bank, and still remove funds that day from the bank's Reserve account.
But in private arrangements, paying banks have no legal obligation to disburse funds on the same day a check is presented.
Instead, paying banks often charge fees for same day settlement, or wait until the next day. This gives the Fed a big competitive advantage over private check clearers.
But under the new rule paying banks will have to provide same day settlement of all checks presented before 8 a.m. eastern time through private systems. Paying banks will not be able to charge extra for the service.
While the Fed will still have an advantage over private check clearers, the advantage will be lessened, bankers said.
"It enhances all private sector alternatives by leveling the playing field," said Howard Wentworth, senior vice president of CoreStates Financial Corp., Philadelphia.
For example, experts predicted that regional clearing houses may start passing checks between each other, rather than forcing banks to set up bilateral arrangements.