Question

Divisions of the Fed known as _____ handle almost all the checks written against a bank in one city and presented for deposit to a bank in a second city.

Multiple Choice

bank holding companies

bank examiners

Federal Reserve banks

Federal Reserve accounts

check clearinghouses

Answer 1

The correct answer is check clearinghouses

Divisions of the Fed known as check clearinghouses handle almost all the checks written against a bank in one city and presented for deposit to a bank in a second city.

Let us understand this with an example

Suppose Mr. A has a bank account with Bank X. He wants to make payment $2000 to his landlord. He draws a check for this purpose and gives it to Mr. B his landlord. Mr.B has a bank account in Bank Y. He deposits the check received from Mr.A in Bank Y. Since it was a check of Bank X from Mr.A, Bank Y will send this to a check clearinghouse for the purpose of settlement of accounts. The check clearinghouse will debit the federal reserve account of Bank A and send the amount of $2000 to the bank account of depositor maintained with Bank Y.

This is the role played by the check clearinghouses. They facilitate the settlement of accounts between banks and ensure smooth flow of operations.