Nonpar Item

AAA

DEFINITION of 'Nonpar Item'

A check, draft or negotiable instrument that a paying bank honors at a discount when presented by another bank for collection. The discount is deducted from the check's (or instrument's) face value.

Nonpar banking, the practice of charging fees to execute a draft or check drawn from another bank, was commonplace in the U.S. until the Federal Reserve check collection system was created in 1916.

INVESTOPEDIA EXPLAINS 'Nonpar Item'

State banking officials were the primary opponents to "par" banking as established by the Federal Reserve System because it would eliminate an important source of revenue – the fees collected to execute the exchange of financial instruments from non-local institutions.

Prior to the Federal Reserve check collection system, banks would charge significant fees to convert paper drafts into currency, typically to enable the draft holder to purchase land. Most land offices accepted only in specie payment for parcels. To avoid nonpar collection charges, banks would send checks to banks with whom they had a "par" relationship for payment, which often began a lengthy process of circuitous routing across the U.S. for final collection. Eliminating nonpar banking through the creation of an efficient collection and clearing system was one of the Federal Reserve System's first goals.

RELATED TERMS
  1. Bank

    A financial institution licensed as a receiver of deposits. There ...
  2. Federal Reserve System - FRS

    The central bank of the United States. The Fed, as it is commonly ...
  3. Negotiable

    1. Describing the price of a good or security that is not firmly ...
  4. Debt Instrument

    A paper or electronic obligation that enables the issuing party ...
  5. In Specie

    A phrase describing the distribution of an asset in its present ...
  6. At Par

    A term that refers to a bond, preferred stock or other debt obligation ...
Related Articles
  1. The Treasury And The Federal Reserve
    Bonds & Fixed Income

    The Treasury And The Federal Reserve

  2. Analyzing A Bank's Financial Statements
    Fundamental Analysis

    Analyzing A Bank's Financial Statements

  3. The Evolution Of Banking
    Credit & Loans

    The Evolution Of Banking

  4. Inside National Payment Systems
    Economics

    Inside National Payment Systems

Hot Definitions
  1. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  2. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  3. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  4. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
  5. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account current interest rates. The earnings multiplier is used ...
  6. Macroeconomics

    The field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena ...
Trading Center