Socialism for the Banks

29 October 2004


Check 21 Becomes Law

Yesterday, a new banking law, called “The Check Clearing for the 21st Century Act or more colloquially “Check 21,” took effect in an effort to bring American banking halfway into the third millennium. At the same time, it reduces the security of money transfers by check. The worst thing it does is take money away from all the banks’ customers to subsidize the bottom line of the banks.

The law does make great sense at the most basic level. In an era of instantaneous communications, it makes no sense for check transfers to take a week before they are cleared. In an era of electronic record keeping, there is a case for getting rid of the constant circulation of physical originals of canceled checks back to the account holder. In an era of global competition, American banks must have cutting edge technology to maintain their place in the market.

So, some kind of “Check 21” law was necessary, but not this “Check 21” law. First, it opens the American system up to fraud. Frank Abagnale, the subject of the 2002 Steven Spielberg movie "Catch Me If You Can," says that the current generation of check readers can only handle 240 dots per inch while even consumer printers can produce documents at 600 dpi. This means fake checks are likely to pass the reader as genuine. Add to this the availability of images on-line and it becomes clear that the original check is a fail-safe. Yet, “Check 21” allows banks to destroy the original, tantamount to destroying evidence.

However, as bad as that may be, the real harm comes in the form of a subsidy to the banks. With immediate effect, funds will be deducted from accounts on which checks are drawn nationwide when are checks are presented for deposit. Fair enough, with instantaneous communications, that is as it should be. But the banks are under no obligation to make the money available in the depositors’ accounts any faster than under the old law. Five business days on a check deposited in a New York bank for a check drawn on a Californian account is standard.

Where does the money go? The cash is not available in the Californian account anymore, but doesn’t become available in New York for five days. There is the subsidy – the banks get to play with the money for a week. It is an interest-free loan that is retained in the name of banking profits. Apparently, it is not enough to have customers pay a buck or two to get access to their own money (while doing the banks’ accounting for them at the same time) at an ATM, and it is not enough that the overnight check clearing is expected to add more than $100 million to bank revenues in the form of bounced check fees. Now, Citibank, Bank of America and the rest get interest free loans from their customers. It’s hard to describe this as capitalism.

© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.

Home