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The Federal Reserve plays a major role in the smooth functioning of the payments system, which helps ensure the nation’s economic growth and financial stability. The 12 Reserve Banks provide banking services to depository institutions by distributing and receiving currency and coin, maintaining accounts, and providing payment services.
An important job of the Federal Reserve is to function as the “banks’ bank,” ensuring that institutions have enough currency and coin on hand to meet current demand, which varies with the level of economic activity and fluctuates based on seasonal demand. The Philadelphia Fed is authorized to issue cash to financial institutions within its District.
Additional currency and coin put into circulation to meet seasonal demand is eventually returned to the depository institutions by businesses. So to reduce the excess currency and coin held in their vaults, depository institutions typically return the excess cash to the Reserve Bank, where it is credited to their accounts. The process is reversed when the institutions need to replenish or increase their cash supply.
The Check Clearing for the 21st Century Act of 2003 (Check 21) promoted the greater use of electronic processing of check images rather than paper checks. This legislation, plus the greater use of electronic payments, has led to a major reduction in paper check processing and dramatic changes in the way the Fed processes checks.
To promote an efficient and reliable payment system, the Federal Reserve has adapted its operations to accommodate the continuing shift from paper checks to electronic payments by consolidating its check-processing operations into two sites: The Atlanta Fed handles electronic check processing and the Cleveland Fed, paper check processing.
The automated clearinghouse (ACH) is an electronic system for processing payments, developed jointly by the private sector and the Federal Reserve in 1972. Businesses use ACH to make direct deposits for payroll, to move funds from one corporate account to another, and to make payments to other businesses. The U.S. government uses ACH for direct deposit of Social Security benefits, Veterans Administration benefits, and receipt of business and consumer tax payments. Consumers use ACH to make payments on insurance premiums, mortgages, loans, and other bills.
The Federal Reserve Banks’ Fedwire services are designed to offer a secure, reliable method of handling large-value, time-critical payments and maintaining and transferring U.S. government and certain government agency, government-sponsored enterprises, and international organization book-entry securities. The Fed’s goal in offering these services is to foster the integrity, efficiency, and accessibility of U.S. wholesale payments and settlement systems in support of domestic financial stability and economic growth in a global context.