Federal Reserve Financial Services

The U.S. payments system is the largest in the world.  Each day, millions of transactions, valued in the trillions of dollars, are conducted between sellers and purchasers of goods, services, or financial assets.  Most of the payments underlying those transactions f low between depository institutions and banks, a large number of which maintain accounts with the Reserve Banks.  The Federal Reserve therefore performs an important role as an intermediary in clearing and settling interbank payments.  The Reserve Banks settle payment transactions efficiently by debiting the accounts of the depository institutions making payments and by crediting the accounts of depository institutions receiving payments.  Moreover, as the U.S. central bank, the Federal Reserve is immune from liquidity problems—not having sufficient funds to complete payment transactions—and credit problems that could disrupt its clearing and settlement activities.

The Federal Reserve plays a vital role in both the nation’s retail and wholesale payments systems, providing a variety of financial services to depository institutions.  Retail payments are generally for relatively small-dollar amounts and often involve a depository institution’s retail clients— individuals and smaller businesses.  Reserve Banks’ retail services include distributing currency and coin, collecting checks, and electronically transferring funds through the automated clearinghouse system.  In contrast, wholesale payments are generally for large-dollar amounts and often involve a depository institution’s large corporate customers or counterparties, including other financial institutions.  The Reserve Banks’ wholesale services include electronically transferring funds through the Fedwire Funds Service and transferring securities issued by the U.S. government, its agencies, and certain other entities through the Fedwire Securities Service.  Because of the large amounts of funds that move through the Reserve Banks every day, the System has policies and procedures to limit the risk to the Reserve Banks from a depository institution’s failure to make or settle its payments.

Tags: bank, Federal Reserve

This entry was posted on Sunday, April 19th, 2009 at 12:24 pm and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.