25-1 Chapter 25 Banks, E-Money, and Financial Reform.

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Chapter 25

Banks, E-Money, and

Financial Reform

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The Bank – Customer Relationship

When a customer makes a deposit into a bank, a creditor–debtor relationship is formed Creditor–debtor relationship: A relationship that is

created when a customer deposits money into the bank The customer is the creditor, and the bank is the debtor

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall.

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The Bank – Customer Relationship

A principal–agent relationship is created if: The deposit is a check that the bank must collect for

the customer The customer writes a check against his or her account

The customer is the principal and the bank is the agent


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UCC Banking Provisions

Revised Article 3 Revised Article 3 (Negotiable Instruments)(Negotiable Instruments)

Article 4 (Bank Deposits Article 4 (Bank Deposits and Collections)and Collections)

Article 4A (Funds Transfer)Article 4A (Funds Transfer)

Revised Article 3 (Negotiable Revised Article 3 (Negotiable Instruments)Instruments)

Article 4 (Bank Deposits Article 4 (Bank Deposits and Collections)and Collections)

Article 4A (Funds Transfer)Article 4A (Funds Transfer)


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Parties to a Check

Drawer : Customer who maintains the checking account and writes checks against it

Drawee : Bank on which check is drawn

Payee : Party to whom check is written


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Exhibit 25.1 – Ordinary Check


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Indorsement of Check

Payee is holder of a check Payee has the right to:

Demand payment of the check Indorse the check to another party by signing the back

of the check Indorsement of a check: A payee’s signing the back of a check in order to turn it over to another party The payee is the indorser The person to whom the check is indorsed is the indorsee


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Special types of Checks

Bank check: A certified check or a cashier’s check, the payment for which a bank is solely or primarily liable


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Bank Checks

Certified check Bank agrees to accept check when presented for

payment Pays out of funds set aside from customer’s account

Cashier’s check Two-party check Bank is both drawer and drawee Holder is payee


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Exhibit 25.2 - Certified Check


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Exhibit 25.3 - Cashier’s Check


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Honoring Checks

Customer agrees to keep sufficient funds in account to cover any checks written

If funds are adequate, bank is under a duty to honor check


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Honoring Checks

Stale checks Check outstanding for more than six months Bank has no obligation to honor

Incomplete checks Drawers sometimes write checks that omit certain

information The UCC places the risk of loss of an incomplete item

on the drawer


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Honoring Checks

Postdated check A check that a drawer does not want cashed until

sometime in the future Stop-payment orders

An order by a drawer of a check to the payer bank not to pay or certify a check

A stop-payment order can be given orally or in writing


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Honoring Checks

Overdrafts The amount of money a drawer owes a bank after it

has paid a check despite the drawer’s account having insufficient funds

Wrongful dishonor A situation in which there are sufficient funds in a

drawer’s account to pay a properly payable check, but the bank does not do so


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Federal Currency Reporting Law

Requires financial institutions and other entities to file Currency Transaction Report with IRS reporting:

Cash transactions in amounts greater than $10,000 Suspected criminal activity by bank customers

involving financial transactions of $1,000 or more


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Forged Signatures

Major problems associated with checks: Signatures are sometimes forged A check itself may have been altered prior to

presentment for payment


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Forged Signature of the Drawer

Forged instrument: A check with a forged drawer’s signature on it

The payer bank cannot charge the customer’s account if it pays a check over the forged signature


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Altered Checks

A check that has been altered without authorization and modifies the legal obligation of a party

If paid, bank can: Charge drawer’s account for original tenor Recover difference between altered amount and

original tenor from party who presented check


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One-Year Rule

If a drawer fails to report a forged or altered check to the bank within one year of receiving the bank statement and canceled checks containing it, the bank is relieved of any liability for paying the instrument


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Series of Forgeries

If the same wrongdoer engages in a series of forgeries or alterations on the same account: The customer must report that to the payer bank within

a reasonable period of time


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Exhibit 25.4 - Check Collection Process


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The Collection Process

The collection process, involving several banks, is governed by Article 4 of the UCC Payer bank: The bank where the drawer has a

checking account and on which a check is drawn Depository bank: The bank where the payee or holder

has an account Collecting bank: The depository bank and other banks

in the collection process Intermediary bank: A bank in the collection process

that is not the depository bank or the payer bank


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Deferred Posting

Deferred posting rule: A rule that allows banks to fix an afternoon hour of 2:00 p.m. or later as a cutoff hour for the purpose of processing items

The deferred posting rule applies to all banks in the collection process


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Provisional Credits

A situation in which a collecting bank gives credit to a check in the collection process prior to its final settlement Provisional credits may be reversed if the check does

not clear


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Final Settlement

A check is finally paid when the payer bank: Pays the check in cash Settles for the check without having a right to revoke

the settlement Fails to dishonor the check within certain statutory

time periods


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Final Settlement

“On us” item: A check that is presented for payment where the depository bank is also the payer bank The drawer and payee or holder have accounts at the same

bank

“On them” item: A check presented for payment by a payee or holder where the depository bank and the payer bank are not the same bank


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Failure to Examine Bank Statements in a Timely Manner

Customer must examine monthly statements of checking accounts in timely fashion and with reasonable care Determine whether checks may have been altered or

forged Promptly notify bank of unauthorized payments

Customer liable if bank suffers a loss due to customer’s failure to perform this duty


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FDIC Insurance of Bank Deposits

Government agency that insures deposits at most bank and savings institutions Backed by full faith and credit of U.S. Limits of $250,000 per single account

Covers savings, checking, money markets, CDs, IRAs

Does not cover stocks, bonds, mutual funds, life insurance, annuities


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E-Banking and E-Money

Electronic Funds Transfer System ATM Point-of-sale terminal Direct deposit and withdrawal Online banking Debit cards


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Consumer Electronic Funds Transfers

Electronic Funds Transfer Act: A federal statute that regulates consumer electronic funds transfers

The Electronic Funds Transfer Act and Regulation E establish the following consumer rights: Unsolicited cards Lost or stolen debit cards Evidence of transaction Bank statements


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Electronic Wire Transfers

Commercial wire transfer (wholesale wire transfer): An electronic transfer of funds from one party to another party

Two principal wire payment systems The Federal Reserve Wire Network (Fedwire) The Clearing House Interbank Payments System

(CHIPS)


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Electronic Wire Transfers

Benefits of using wire transfers Speed Low cost


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Dodd-Frank Wall Street Reform andConsumer Protection Act

A federal statute that: Reorganizes federal government supervision of the

banking system Regulates previous unregulated financial products and

institutions Adds a new consumer protection agency to protect

consumers from abusive lending and banking practices


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Landmark Law - Bank Reform Mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act

The most important provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act are: Bank regulation Lending regulation Bureau of Consumer Financial Protection


25-1 Chapter 25 Banks, E-Money, and Financial Reform.

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Transcript of 25-1 Chapter 25 Banks, E-Money, and Financial Reform.