Large value transfers of funds
are usually done
over systems about which most citizens are unaware and few have direct
contact. These systems are used to move enormous dollar amounts
by electronic means.
The Fedwire funds transfer system
is a real-time
gross settlement system in which about 8,500 depository institutions
transfers of funds that are immediate, final, and irrevocable when
Depository institutions that maintain a reserve or clearing account
a Federal Reserve Bank may use Fedwire to send payments to, or receive
payments from, other account holders directly.
Depository institutions use
Fedwire to handle
large-value, time-critical payments, such as payments for the
of interbank purchases and sales of federal funds; the purchase, sale,
and financing of securities transactions; the disbursement or repayment
of loans; and the settlement of real estate transactions
The Clearing House Interbank Payment
(CHIPS) is the electronic equivalent of payment by check. As of April 2008
this system linked 46 banks with branches in New York to a central computer, clearing and
settling about 350,000 transactions per day with an average total value
excess of $2 trillion. Most payments over CHIPS are related to
foreign exchange and Eurodollar markets.
As an example, suppose a British
bank needs to
pay a French bank $100 million in U.S. dollars. The British bank
executes the payment through its branch in New York if it has one, or
a New York bank with which it has a deposit. The payment is made
over CHIPS to the New York branch of the French bank if it has one, or
to a New York bank at which it has a deposit.
As with the check clearing
process, payments are
netted to minimize the amounts needed to settle. The CHIPS
keeps track of each bank's net position relative to all other banks on
the system. At 4:30 PM each day, the CHIPS computer sends each
a summary of its payments for the day and its final net position.
Each bank with a net debt must transfer funds to a special account at
Fed. At 6:00 PM, banks that are owed money receive payment out of
the special account.
As with a checking account, there
is a danger
that a bank may not have sufficient funds to settle at the end of the
If that happens, all banks to which it owes money would remain
Strict rules are imposed on the participating banks to minimize this
If a bank does fail during the day, CHIPS has a loss sharing
in which the other banks must cover the failed bank's debt in
to each bank's credit limit to the failed bank.
Automated Clearing Houses
Fedwire and CHIPS are on-line
systems on which
payments can be executed immediately. ACHs are a slower but less
expensive method of electronic payment. Payroll payments are usually
that way. The data is sent to an ACH, together with information
other banks. Payment instructions are passed on, and payments to
and from the various banks are netted. Settlement of net
is made over Fedwire.
ACHs handle both credit transfers and
Credit transfers are similar in nature to giro payments, e.g. direct
to your bank account. Debit transfers are similar in nature to
e.g. authorizing your insurance agency to take monthly payments from
bank deposit. In the U.S. most ACHs are operated by the Fed,
there are private operations too.