• Cash Processing
• Processing Checks
• Electronic Payments
• Lending to Banks

The Fed provides many services for U.S. banks. These activities are vital to the financial health of the economy.

The cash in the banks is generated from deposits made by customers and acquired from the Fed. Both coins and paper money are produced by the U.S. Treasury, but put into circulation by the Federal Reserve.

When the banks need cash they order it from the Fed. Banks maintain accounts at the Fed for several reasons, one of which is to meet their reserve requirements. The Fed collects payment for the cash it ships to a bank by debiting the bank’s account with the amount. When a bank has more cash than it needs, it ships the excess to the Fed for a credit to its account.

The Fed uses state-of-the-art, high-speed machines to verify the deposit amounts and to identify possible counterfeits, which it sends to the U.S. Secret Service for investigation.

The Fed shreds bills that are no longer fit for circulation. Most of the shredded money is disposed off in landfills, while some is sold to businesses, under Treasury Department rules, and some turned into stationery products under contract with the company that makes paper on which currency is printed.

Check processing is another important service provided to banks by the Fed. The Fed processes 35 to 40 percent of the inter-bank checks (that is, the checks that are deposited in a bank other than the one on which they are drawn) written in the United States each year. The rest are processed through private clearing arrangements.

To promote competition in the check-processing field, Federal law requires the Fed to charge fees that reflect the Fed’s full costs of providing the service.

Here is how a check is processed:

The Fed provides two electronic payment services:

1. Fedwire: Allows banks to make large electronic transfers of funds or U.S. Government securities in a matter of seconds. Fedwire is used by Federal Reserve Banks and their branches, the Treasury and other government agencies and depository institutions. During 2006, an average of $3.8 trillion per day was transferred over Fedwire.
2. Automated Clearing House (ACH): Individuals are more likely to use this service as it provides a more efficient alternative to checks, especially when recurring payments are involved. This service is typically used for payments such as:

• salaries
• Social Security benefits
• corporate dividends, and
• consumer payments such as rent, phone bills, etc.

The Fed has three lending programs for depository institutions—primary credit, secondary credit and seasonal credit programs. The interest rates charged for these loans are established by each Reserve Bank’s board of directors every two weeks and are subject to review and determination by the Board of Governors of the Federal Reserve System.

• Primary credit is available to financially sound depository institutions on a very short-term basis, typically overnight. To assess financial soundness, the Fed regularly reviews the institution’s supervisory ratings and capital.
• Secondary credit is offered to depository institutions that do not qualify for primary credit. It is extended on a very short-term basis, usually overnight. Reflecting the less-sound financial condition of these borrowers, the secondary credit rate is typically one-half of a percentage point higher than the primary credit rate.
• Seasonal credit is available to small and mid-sized depository institutions program that experience recurring annual funding needs because of seasonal swings in their deposits and loans. Main users of this facility are banks in farm and tourist areas. The seasonal credit rate is based on market interest rates.

September 2007