Check Clearing for the
Century
st
21
Suppose that I write a check to Notre
Dame for $100
Notre Dame deposits
that check at Bank
One
Assets
Liabilities
Notre Dame: +$100
John Stiver: -$100
If I have an account at Bank One, my account and Notre
Dame’s account are adjusted accordingly and the transaction
ends
Suppose, instead, that my check is
from an account at the Bank of New
York in Manhattan
Bank One has three options
1. Mail the check directly to the Bank of New York
for clearance
2. Send the check to a private clearinghouse
3. Use the Federal Reserve check clearing service
Americans write roughly 45 Billion checks per year. Around 30%
are cleared through the Federal Reserve!!
Assets
Items in the process
of collection: +$100
Liabilities
Notre Dame: +$100
Notre Dame’s account is provisionally credited (the funds
aren’t available until the check clears)
The Check is loaded on
a truck and shipped to
the Chicago Fed
South
Bend
The Chicago Fed credits Bank One’s Reserve account
(provisionally). At this point, the money supply
officially increases by $100 (Known as the Float)
Assets
Liabilities
Assets
Bank One:
+$100
Reserves:
+$100
Items under
collection:
-$100
Liabilities
Notre Dame:
+$100
The check is then loaded onto a plane (the Fed
has its own charter service) and flown to the
New York Fed
The check is then sent to the Bank of NY. Once
the bank receives the check, it can authorize
payment. The Chicago Fed is notified of the
availability of funds as is Bank One
Assets
Reserves: -$100
Liabilities
John Stiver: -$100
The Float drops by $100 and
the transaction is over
Every check is
required to have four
numbers
ABA Routing Number
ACH Transit Route
Check
Number
Account Number
The Federal Reserve System has twelve districts
numbered 1 – 12 from east to west…
Each District is further
subdivided into branches
For example, South
Bend falls under the
Chicago branch
You are here!
Boston (District 1)
Boston (Branch 1)
Windsor Locks (Branch 2)
New York (District 2)
Philadelphia (District 3)
Eastern
Districts
Cleveland (District 4)
Richmond (District 5)
Atlanta (District 6)
Cleveland (Branch 1)
Cincinnati (Branch 2)
Pittsburgh (Branch 3)
Columbus (Branch 4)
Richmond (Branch 1)
Baltimore (Branch 2)
Charlotte (Branch 3)
Atlanta (Branch 1)
Birmingham (Branch 2)
Jacksonville (Branch 3)
Nashville (Branch 4)
New Orleans (Branch 5)
Miami (Branch 6)
Western
Districts
Chicago (District 7)
Chicago (Branch 1)
Detroit (Branch 2)
St. Louis (District 8)
St. Louis (Branch 1)
Little Rock (Branch 2)
Louisville (Branch 3)
Memphis (Branch 4)
Minneapolis
(District 9)
Minneapolis (Branch 1)
Helena (Branch 2)
Kansas City (District 10)
Kansas City (Branch 1)
Denver (Branch 2)
Oklahoma City (Branch 3)
Omaha (Branch 4)
Dallas (District 11)
Dallas (Branch 1)
El Paso (Branch 2)
Houston (Branch 3)
San Antonio (Branch 4)
San Francisco (District 12)
The ABA (American Banking Association)
routing number has four components.
XX XX XXXX X
Institution
Code
Federal Reserve
Branch/Distance from
Branch
Federal Reserve
District
(01 -12 or 21 – 32)
Check Sum
The ABA (American Banking Association)
routing number has three components.
271291596
This is the Routing
Number for NDCU
ND Credit
Union
Federal Reserve Branch
and District:
27 = Chicago
1 = Chicago Branch
2 = Distance From Branch
Check Sum
The Check Sum guarantees that the routing
number is valid
2X3=6
7 X 7 = 49
1X1=1
2X3=6
9 X 7 = 63
6 + 49 + 1 + 6 + 63 + 1 + 15 + 63 + 6 = 210
1X1=1
5 X 3 = 15
9 X 7 63
6X1=6
Every valid routing number
must sum to a total that is
divisible by 10!!
“If you change the 02 -New York - to a
12 – San Francisco, rather than going to
the New York Fed, the check is routed to
California. The hanger can paper the
city for days before the banks realize
what’s happening!”
This is only true if:
1. You alter the check sum digit as well
as the district code (otherwise, the
routing number is invalid)
2. You alter the branch code (it has to
be routed to a proper branch)
3. The is a bank in the San Francisco
with the existing institution code
Check 21

Check 21 went into effect in October 2004.
The key result of check 21 is that an
electronic image of a check became a
legal document. This electronic
conversion can happen at any point in the
clearing process
Suppose that I write a check to Notre
Dame for $100
Notre Dame scans the check and
creates an image file
Within seconds, $100 has
been deducted from my
account and credited to ND’s
account!!
Chicago emails the
check to the Bank of NY
Notre Dame
emails the
check to Bank
One
Bank One
emails the
check to the
Chicago Fed
Drawbacks to Check 21
Consumers no longer have access to the
float (i.e. your account is deducted at the
point of sale), but banks do (i.e., banks
can still delay the availability of funds)
 All paper checks must become Check 21
compliant
 Without a hard copy, the possibility of
accounts being credited/debited multiple
times exists
