Tina walked up to Jennifer and said, “We’ve just gotten a call from a bank in Texas. We’ve transferred a lot of money into accounts there, and they won’t let us transfer any more because we already owe them so many millions of dollars. They want us to settle the balance now, by wiring them the money on the books of the Federal Reserve System.”

Jennifer explained, “We don’t do business with the Federal Reserve Bank. We order two-dollar Federal Reserve notes and all our coins through a commercial bank that does business with the Federal Reserve. As you know, any one-dollar bills and any bills larger than two dollars, we deposit. We keep two-dollar bills, Sacagawea dollars, half-dollars, quarters, dimes, nickels and cents in the vault. One option here would be to hire an armored car and load it with two-dollar bills and send it to Texas, but that would take time and cost money. That’s inefficient. Find out the names of their correspondent banks. We currently have a large positive balance at two of the big banks that private money orders are drawn on. That’s because we’ve been depositing the money orders electronically all afternoon into our accounts at those banks. We’ll transfer our money from our account at one of those banks, to the account of the bank that called.”

Tina asked, “But what if we don’t have a correspondent bank in common?”

Jennifer replied, “What we do then is, we find a string of correspondence. We transfer our money to the account of another bank, which charges the first bank and credits the payee bank. We totally avoid the need to settle through the Federal Reserve System.”

Ten minutes later, Jennifer phoned the bank in Texas. “I’m glad you called.” she said. “We just transferred fourteen million dollars to your account at another one of your correspondent banks. I just wanted to thank you for the call. We had a large positive balance at that bank, putting us at risk because if they failed, we’d lose our money there, but we’d still owe you. That would set us back a few months. If they fail later today, we lose less, because we’ve already paid you. In the future, feel free to let us know if there’s a specific correspondent bank you want us to settle through. That way, you don’t run into the same problem with the correspondent bank that you ran into with us, a positive balance getting too high. Maybe you’d prefer we transfer the money to your account at a correspondent bank to which you owe money. It is in everybody’s best interest to keep correspondent banking balances to a minimum.”