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 Endorsement

    An endorsement by a bank for a negotiable instrument, such as ...
  2. In Specie

    A phrase describing the distribution of an asset in its present ...
  3. Bank

    A financial institution licensed as a receiver of deposits. There ...
  4. At Par

    A term that refers to a bond, preferred stock or other debt obligation ...
  5. Negotiable

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

    A paper or electronic obligation that enables the issuing party ...
RELATED FAQS
  1. Why do banks used the Five Cs of Credit?

    Banks use rigorous policies and analyses when determining if and how much money to lend to clients. The methods used by banks ... Read Full Answer >>
  2. How do interest rate changes affect the profitability of the banking sector?

    The banking sector's profitability increases with interest rate hikes. Institutions in the banking sector such as retail ... Read Full Answer >>
  3. What are the pros and cons of online checking accounts?

    Online banking offers a convenient alternative to keeping your checking account with a brick-and-mortar bank. With an online ... Read Full Answer >>
  4. What is a standby letter of credit (SLOC)?

    A standby letter of credit, or SLOC, is a financial instrument that provides a guarantee of payment to a beneficiary in the ... Read Full Answer >>
  5. How do commercial banks make money?

    Commercial banks make money by providing loans and earning interest income from those loans. Customer deposits, such as checking ... Read Full Answer >>
  6. Should commercial and investment banks be legally separated?

    Following the financial crisis of 2008-2009, much of the blame was directed at large financial institutions that took on ... Read Full Answer >>
Related Articles
  1. Bonds & Fixed Income

    The Treasury And The Federal Reserve

    Find out how these two agencies create policies to stimulate the economy in tough economic times.
  2. Fundamental Analysis

    Analyzing A Bank's Financial Statements

    A careful review of a bank's financial statements can help you identify key factors in a potential investment.
  3. Credit & Loans

    The Evolution Of Banking

    Banks are a part of ancient history. Find out how this system of money management developed into what we know today.
  4. Economics

    Inside National Payment Systems

    Investopedia explains: The global interconnection of U.S. payment systems makes commerical and financial transfers possible.
  5. Personal Finance

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  6. Economics

    The SEC: A Brief History Of Regulation

    The SEC has continued to make the market a safer place and to learn from and adapt to new scandals and crises.
  7. Personal Finance

    How The Federal Reserve Was Formed

    Find out how this institution has stabilized the U.S. economy during economic downturn.
  8. Economics

    When The Federal Reserve Intervenes (And Why)

    The Federal Reserve doesn't interfere with the economy every time it flounders. Find out more here.
  9. Credit & Loans

    The Pros & Cons Of Personal Loans vs. Credit Cards

    One is not like the other. We help you decide where to borrow money from.
  10. Budgeting

    Should You Pay Your Bills On Autopilot?

    Now that you can sign up to have your bills paid automatically online, it it a smart way to make your life more efficient? A look at the pros and cons.

You May Also Like

Hot Definitions
  1. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  3. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  4. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  5. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  6. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
Trading Center