Nonpar Item

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.

BREAKING DOWN '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 Draft

    A type of check where the payment is guaranteed to be available ...
  2. Demand Draft

    A method used by individuals to make transfer payments from one ...
  3. Share Draft

    A type of draft used in credit unions as a way to access funds ...
  4. Payable Through Draft

    A draft that is payable through a specific bank. Payable-through-draft ...
  5. Authorized Settlement Agent

    A bank that is authorized to submit checks and other cash items ...
  6. Negotiable

    1. Describing the price of a good or security that is not firmly ...
Related Articles
  1. Markets

    What's a Bank Draft?

    A bank draft is a type of check. The bank guarantees payment, making it a more attractive option for the check recipient.
  2. Markets

    What's the Federal Funds Rate?

    The federal funds rate is the interest rate banks charge each other for overnight loans to meet their reserve requirements.
  3. Personal Finance

    Top 5 Reasons Banks Won't Cash Your Check

    Learn the top reasons that a bank won't cash your check, and find out what steps you can take to prevent those scenarios from happening.
  4. Markets

    Regional Banks Give The Fed A National Perspective

    We all know that the Federal Reserve utilizes monetary policy to control the economy, but what do the 12 regional Federal Reserve Banks do?
  5. Markets

    Explaining the Federal Discount Rate

    The federal discount rate is the rate at which eligible banks or other depository institutions can borrow funds from a Federal Reserve bank.
  6. Managing Wealth

    Retail Banking Vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers.
  7. Investing

    The Banking System: Federal Reserve System

    ByStephen D. Simpson, CFA The central bank of the United States is the Federal Reserve System. The Federal Reserve System came into being in 1913, after the passage of the Federal Reserve Act ...
  8. Personal Finance

    2015's Top Checking Account Promotions

    Open a checking account in 2015 and the bank could give you a cash bonus. Check out these top offers.
  9. Investing

    Banking: Check-Writing 101

    By Amy FontinelleThe ability to write checks from your checking account allows you to pay bills or send money to relatives more securely than using cash and less expensively than using a cashier's ...
  10. Managing Wealth

    Changes To Your Checking Account

    Checking accounts have evolved a lot over the years. Here are the five biggest changes that can affect your wallet.
RELATED FAQS
  1. How can I cancel a bank draft that I have purchased?

    Learn about what a bank draft is and how it works, the circumstances under which a bank draft may be cancelled, and what ... Read Answer >>
  2. How do you calculate payback period using Excel?

    Understand the various fees that can be assessed on a personal or business checking account, and learn methods to avoid being ... Read Answer >>
  3. What US banks offer free checking accounts?

    Quit wasting money on monthly fees associated with your checking account and get a free checking account from reputable national ... Read Answer >>
  4. What are the differences between preference shares and bonds?

    Learn what information banks keep on file for their customers, and understand how this information can be used to deny an ... Read Answer >>
  5. Why do commercial banks borrow from the Federal Reserve?

    Learn how commercial banks borrow from the Federal Reserve to meet minimum reserve requirements, and discover the pros and ... Read Answer >>
  6. What do banks do to control the bank reserve?

    Understand what the Federal Reserve does in order to expand or contract the economy. Learn what depository institutions can ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center