The Federal Reserve is a "bank for banks" and provides financial services to depository institutions such as banks, credit unions, and savings and loans. The services provided are much like those that depository institutions provide to their customers. These services include collecting checks, electronically transferring funds and distributing and receiving cash and coin.
Federal Reserve Banks provide two types of electronic payment services; the automated clearinghouse service (ACH) and wire transfers (Fedwire).
The Automated Clearinghouse (ACH) is an electronic payment network through which depository institutions send each other electronic credit and debit transfers. Some examples are payroll deposits, corporate payments to vendors, Social Security payments, insurance premium payments and utility payments.
The Fedwire funds transfer system is a large-dollar electronic payment system owned and operated by the Federal Reserve Banks that transfers funds between financial institutions. Participants typically transfer large dollar, time-critical payments, such as to disburse or repay large loans or to settle real estate transactions. The majority of Fedwire transactions are initiated on-line and all transactions are completed in seconds.
The Federal Reserve System operates a nationwide check clearing system that processes checks, drafts and similar items. When a depository institution receives deposits of checks drawn on other institutions, it may send the checks for collection to a Federal Reserve Bank. For checks collected through the Federal Reserve Banks, the accounts of the collecting institutions are credited for the value of the checks deposited for collection and the accounts of the paying banks are debited for the value of checks presented for payment. Most checks are collected and settled within one business day.
A 2004 federal law, the Check Clearing for the 21st Century Act, also known as Check 21, facilitates the electronic exchange of checks. Check 21 permits banks to replace original checks with “substitute checks,” special paper copies of the front and back of the original check that are the legal equivalent of the original check. Banks can now make an image of a check, send the image electronically to another location and then print a substitute check from the image to present for payment locally.
It's up to the Fed to make sure there is enough money in circulation. Reserve Bank offices maintain cash and coin processing operations to accept deposits and distribute cash and coin to financial institutions. When cash and coin are deposited with the Reserve Banks, notes that are suspected of being counterfeit are separated from the rest and forwarded to the Secret Service. Notes that are too worn for recirculation are destroyed using a shredding machine and their face value is deducted from the total amount of Federal Reserve notes outstanding.
Each of the twelve Federal Reserve Banks is authorized by the Federal Reserve Act to issue currency. Currency must be secured by legally authorized collateral, most of which is in the form of U.S. Treasury and federal agency securities held by the Reserve Banks. The notes are designed and printed by the Bureau of Engraving and Printing of the Department of the Treasury and are delivered to the Reserve Banks for circulation.
A Bank for the Government
Additionally, the Federal Reserve acts as a fiscal agent or bank to the federal government by providing financial services to the United States Department of Treasury and by selling and redeeming government securities such as Savings Bonds and Treasury bills.
One of the core responsibilities of the Federal Reserve Banks is to serve as fiscal agent and depository for the United States government. In this role, the Reserve Banks act as the federal government's bank and perform several services for the Treasury. These services include:
- Maintaining accounts for U.S. Treasury
- Processing government checks, postal money orders and U.S. savings bonds
- Collecting federal tax deposits
The Federal Reserve Banks issue, service, and redeem tens of millions of U.S. savings bonds each year on behalf of the Treasury. Savings bonds are a contract evidencing a loan made to the United States. For more information about savings bonds, visit the United States Department of the Treasury Web site.