Due From Banks

Due from Domestic Banks—Demand

Banks maintain deposits in other banks to facilitate the transfer of funds. Those bank assets, known as “due from bank deposits” or “correspondent bank balances,” are a part of the primary, uninvested funds of every bank. A transfer of funds between banks may result from the collection of cash items and cash letters, the transfer and settlement of securities transactions, the transfer of participating loan funds, the purchase or sale of federal funds, and from many other causes.

Banks also utilize other banks to provide certain services which can be performed more economically or efficiently by the other banks because of their size or geographic location. Such services include processing of cash letters, packaging loan agreements, funding overline loan requests of customers, performing EDP and payroll services, collecting out of area items, exchanging foreign currency, and providing financial advice in specialized loan areas. When the service is one-way, the bank receiving that service usually maintains a minimum balance that acts as a compensating balance in full or partial payment for the services received.

All national banks are required by 12 CFR 204 to keep reserves equal to specified percentages of the deposits on their books. These reserves are maintained in the form of vault cash or deposits with the Federal Reserve bank. The Federal Reserve bank monitors the deposits of each bank to determine that reserves are kept at required levels. The reserves provide the Federal Reserve System with a means of controlling the nation’s money supply. Changes in the level of required reserves affects the availability and cost of credit in the economy. The examiner must determine that the information supplied to the Federal Reserve bank for computing reserves is accurate.

In some instances, a nonmember financial institution may borrow funds from a Federal Reserve bank, and the transaction is processed through the reserve account of a national bank with which the nonmember institution has a correspondent relationship. Under the reserve account charge agreements used by most of the Federal Reserve banks, the national bank’s reserve account may be charged if default occurs on the nonmember’s loan processed through the national bank’s account. Since the national bank may not act as the guarantor of the debts of another, it may only legally enter into revocable reserve account charge agreements. Revocable agreements allow the national bank, at its option, to revoke the charge and thus avoid liability for the debt of the nonmember correspondent. In contrast, irrevocable charge agreements constitute a binding guarantee of the nonmember correspondent’s debt and generally cannot be entered into by a national bank. Banks which enter into revocable charge agreements should establish written procedures which will ensure their ability to effect prudent decisions in a timely manner.

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