1. Check Clearing for the 21st Century

2. Suppose that I write a check to Notre Dame for $100
Notre Dame deposits that check at Bank One

3. Assets Liabilities Notre Dame: +$100 John Stiver: -$100
If I have an account at Bank One, my account and Notre Dame’s account are adjusted accordingly and the transaction ends

4. Suppose, instead, that my check is from an account at the Bank of New York in Manhattan
Bank One has three options
Mail the check directly to the Bank of New York for clearance
Send the check to a private clearinghouse
Use the Federal Reserve check clearing service
Americans write roughly 45 Billion checks per year. Around 30% are cleared through the Federal Reserve!!

5. Items in the process of collection: +$100 Notre Dame: +$100
Assets
Liabilities
Items in the process of collection: +$100
Notre Dame: +$100
Notre Dame’s account is provisionally credited (the funds aren’t available until the check clears)

6. The Check is loaded on a truck and shipped to the Chicago Fed
South Bend

7. The Chicago Fed credits Bank One’s Reserve account (provisionally)
The Chicago Fed credits Bank One’s Reserve account (provisionally). At this point, the money supply officially increases by $100 (Known as the Float)
Assets
Liabilities
Assets
Liabilities
Bank One: +$100
Reserves: +$100
Notre Dame: +$100
Items under collection: $100

8. The check is then loaded onto a plane (the Fed has its own charter service) and flown to the New York Fed

9. The check is then sent to the Bank of NY
The check is then sent to the Bank of NY. Once the bank receives the check, it can authorize payment. The Chicago Fed is notified of the availability of funds as is Bank One
Assets
Liabilities
Reserves: -$100
John Stiver: -$100
The Float drops by $100 and the transaction is over

10. Every check is required to have four numbers
ACH Transit Route
Account Number
ABA Routing Number
Check Number

11. The Federal Reserve System has twelve districts numbered 1 – 12 from east to west…

12. Each District is further subdivided into branches
For example, South Bend falls under the Chicago branch
You are here!

13. Eastern Districts Boston (Branch 1) Boston (District 1)
Windsor Locks (Branch 2)
New York (District 2)
Philadelphia (District 3)
Cleveland (Branch 1)
Cincinnati (Branch 2)
Cleveland (District 4)
Eastern Districts
Pittsburgh (Branch 3)
Columbus (Branch 4)
Richmond (Branch 1)
Richmond (District 5)
Baltimore (Branch 2)
Charlotte (Branch 3)
Atlanta (Branch 1)
Birmingham (Branch 2)
Jacksonville (Branch 3)
Atlanta (District 6)
Nashville (Branch 4)
New Orleans (Branch 5)
Miami (Branch 6)

14. Western Districts Chicago (Branch 1) Chicago (District 7)
Detroit (Branch 2)
St. Louis (Branch 1)
Little Rock (Branch 2)
St. Louis (District 8)
Louisville (Branch 3)
Memphis (Branch 4)
Minneapolis (District 9)
Minneapolis (Branch 1)
Helena (Branch 2)
Western Districts
Kansas City (Branch 1)
Denver (Branch 2)
Kansas City (District 10)
Oklahoma City (Branch 3)
Omaha (Branch 4)
Dallas (Branch 1)
El Paso (Branch 2)
Dallas (District 11)
Houston (Branch 3)
San Antonio (Branch 4)
San Francisco (District 12)

15. The ABA (American Banking Association) routing number has four components.
XX XX XXXX X
Institution Code
Federal Reserve Branch/Distance from Branch
Federal Reserve District
( or 21 – 32)
Check Sum

16. The ABA (American Banking Association) routing number has three components.
This is the Routing Number for NDCU
ND Credit Union
Federal Reserve Branch and District:
27 = Chicago
1 = Chicago Branch
2 = Distance From Branch
Check Sum

17. The Check Sum guarantees that the routing number is valid
2 X 3 = 6
7 X 7 = 49
1 X 1 = 1
9 X 7 = 63
5 X 3 = 15
9 X 7 63
6 X 1 = 6
= 210
Every valid routing number must sum to a total that is divisible by 10!!

18. “If you change the 02 -New York - to a 12 – San Francisco, rather than going to the New York Fed, the check is routed to California. The hanger can paper the city for days before the banks realize what’s happening!”
This is only true if:
You alter the check sum digit as well as the district code (otherwise, the routing number is invalid)
You alter the branch code (it has to be routed to a proper branch)
The is a bank in the San Francisco with the existing institution code

19. Check 21
Check 21 went into effect in October The key result of check 21 is that an electronic image of a check became a legal document. This electronic conversion can happen at any point in the clearing process

20. Suppose that I write a check to Notre Dame for $100
Notre Dame scans the check and creates an image file
Notre Dame s the check to Bank One
Within seconds, $100 has been deducted from my account and credited to ND’s account!!
Bank One s the check to the Chicago Fed
Chicago s the check to the Bank of NY

21. Drawbacks to Check 21
Consumers no longer have access to the float (i.e. your account is deducted at the point of sale), but banks do (i.e., banks can still delay the availability of funds)
All paper checks must become Check 21 compliant
Without a hard copy, the possibility of accounts being credited/debited multiple times exists