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Check Clearing Process Explained

The document describes the check clearing process between two banks, where a check is deposited in one bank and deducted from the issuing bank through intermediaries of the Federal Reserve and local Federal Reserve Banks. It notes that this process causes continual changes to cash and reserve balances on bank and Federal Reserve balance sheets respectively, requiring defensive open market operations by the Federal Reserve to stabilize fluctuations in the monetary base.

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snowleopard1996
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64 views1 page

Check Clearing Process Explained

The document describes the check clearing process between two banks, where a check is deposited in one bank and deducted from the issuing bank through intermediaries of the Federal Reserve and local Federal Reserve Banks. It notes that this process causes continual changes to cash and reserve balances on bank and Federal Reserve balance sheets respectively, requiring defensive open market operations by the Federal Reserve to stabilize fluctuations in the monetary base.

Uploaded by

snowleopard1996
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Check clearing process an example:

I have an account with Citibank You have an account with BOA


in NYC in Philadelphia

I You
give a check for $50,000
(1) (2)

deposit in
at BOA (3)
your a/c
(8) +50,000 Philadelphia Fed
BOA a/c (5)
+50,000
My a/c at (4)
Citibank
-50,000

(7) New York Fed


Citibanks a/c
-50,000
(6)

Cash item on banks balance sheet and reserves item on Feds balance sheet
continually changing => monetary base is continually changing.
Defensive open market operations used to stabilize daily fluctuations in the base
(involves repos and reverse repos by Fed).

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