Why do Banks Hold Checks?
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When you deposit a check into a bank, a waiting period is usually assessed. This waiting period, sometimes called a clearing period, is the length of time the bank will hold checks in order to assess whether or not the funds are available. There are also a few other reasons why a bank may hold checks before making the cash available.
A few different factors influence the waiting time for a check deposited into your account. Where the check comes from is one such factor. Checks are classified by the bank as either local or non local. Banks hold checks for specific periods of time based on this designation.
Checks are designated as local when they are deposited within a bank’s geographical region. This specified region can include many different areas within the state where the bank is located. Banks are allowed to hold checks that are locally deposited for one day. After a local check has been deposited, the funds should be available by the morning of the second business day. The bank should not hold checks that are local for longer than one day.
Non local checks are deposited outside of the bank's specified region. These checks take longer to process. After a non local check has been deposited, the funds should be available by the morning of the fifth business day.
If you think that your bank is taking longer than expected to clear a check, ask for the bank’s availability schedule. This will explain exactly how long the bank will hold checks before the funds are available. Maximum check holding times are mandated by law. A bank is not allowed to hold checks for longer than the law stipulates. The bank is free to cash checks earlier than the maximum legal time limit.
Certain types of checks should be available immediately, or at the latest, the day after deposit. Paychecks are usually processed electronically and should be available by the next business day. Money orders from the U.S. Postal Service should also be available by the next day. Checks drawn by the U.S. Treasury and deposited straight into a payee account are also available the following day. There are numerous other government related checks that should also be next day available, and a list of these can be obtained from any bank.
Also, when assessing how long your bank holds checks, be sure to take into account their business hours. A bank’s business day is measured by its opening hours, and each bank may have its own specified cut-off times. A check deposited at a certain time may be dealt with on the same day in one bank, but at a different bank, it may not be. You should be able to determine a bank’s cut-off time by asking a teller. All of the factors discussed above go into making up how long a bank can hold checks until the cash is placed into your account.
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6
The reason checks are held are vast and various. But first I want to say banks do not know "instantly" whether a check will clear or not. Because of check 21 turn around time is much faster but they do not have access to all banks' information. The process is the same: the check is deposited at your financial instituiton and then presented to the institution that it is drawn on. This is a 2-3 day process. I.e.: you deposit a check on Monday it is received by drawee bank on Tuesday. It can't be returned until Wednesday if funds are not available and then received by depositing bank on thursday. Because of check 21 these items can be recieved via an electronic file instead of paper items which speeds the process but does not tell them immediately whether a check is honored or not.
Accounts that maintain a low or delinquent balance are a risk to the bank and any check deposited can present an additional loss to the bank if not paid.
Large dollar checks if not paid would also be a huge risk to the financial institution if not paid as well as the depositor. It is a safeguard for both the customer and the bank to place a hold on such an item. Imagine how devasted you would be if you had to repay $5000 that you didn't have.
Insurance checks are notorious for being returned, most often for stop payment. Insurance companies for whatever reason will issue checks and then decide not to pay or that the amount is incorrect, thus stopping payment on the issued check in order to reissue. They are also the most commonly forged checks. There again the depositor is responsible for covering the check if it is returned.
Just remember the saying don't count your chickens before they're hatched. Well, don't count your money before the check clears. - anon48813
5
I'm not sure this article discussed "why" banks hold them. Clearly, the answer is because they can, but still.
They certainly know (via Check 21 legislation) that the check cleared - usually instantly, or at least the same day. The rest is profit. they just like to excuse the practice using "local", "non-local" and other crap. - anon48610
4
This (rule CC) may have been great in 1988 when it was passed but needs amending. I believe that technological advances and electronic clearing now allow banks to know sooner if checks are good or not. - anon38016
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Banks in Las Vegas hold checks longer, *much* longer than stipulated, as maximum hold time, by law. - anon35275
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How long can a bank hold a deposit check into an account without crediting the funds? - spena
1
why are insurance checks held? - anon22501
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Written by
Garry Crystal
Last Modified: 15 October 2009
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