Bank draft "limbo" - Independent Holding Body???

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Betsy Og

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Bit of an unusual question I've been asked:

You draw a bank draft from, say, BOI, payable to yourself, it leaves your account. Where does it then go? If BOI went completely wallop (deposits forfeit etc) would your money be safely held in a type of Independent Holding Body?? [I know all about the various guarantees, but this guy is thinking in terms of 'end of the world' scenarios]

I told them that AFAIK it would still be held by BOI until some other bank, calling on your bank draft, looked for the money from BOI.

I know there's central clearing systems for bank cheques etc, but my understanding of these was that they net off transfers to and from, say, BOI and AIB and every so often make a net transfer to whoever's owed.

A related one - if you get a bank draft and it gets destroyed/lost etc, presumably the money re-appears in your account after a certain period of time (the draft then being out of date and no longer negotiable by the holder)??

You may think I'm daft for asking these things, but they've been put to me by vastly more wealthy person with mutiples of the experience I have in financial matters.
 
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In terms of a draft going out of date, there is no legislation that says a draft (or cheque for that metter) goes out of date after a period of time. The Bills of Exchange act makes a reference to a cheque not having been in circulation for an unreasonable period of time but doesn't define it. Banks have traditionally interpreted this as 6 months but they can (and will) debit people's bank accounts with a cheque that is more then 6 months old.

Hence, if the draft is not presented for payment after a period of time, your account will not be credited back as the bank is still facing a potential liability if the draft subsequently comes back in.

Bear in mind as well because a draft is not a cheque as it does not meet the definition of a cheque under the Bills of Exchange Acts. Were it to be lost or damaged and a replacement sought, the bank would only issue one, and place a stop on the original, on receipt of you signing a letter of indemntiy which in effect says that were the original one to turn up and be paid by the bank, (regardless of any stop) you'd still be liable for the original and replacement draft. In effect, if a draft gets lost and you get a replacement you run the risk of being debited twice by the bank

In terms of value exchange, all of the main banks hold an exchange account at the Central Bank and on a daily basis, the CB nets off all the money (for example), AIB owe BoI for cheques presented the previous day against all the money BoI owe AIB and then transfers funds accordingly. This takes place every afternoon.

There is no independent holding body. In terms of financial transactions, the following would happen if you ordered a draft
Debit your bank account
Credit the banks draft account

when the draft is presented for payment
Debit the banks draft account
Credit the payee or the payee's bank for them to subsequently credit the payee
 
thanks for that, the principle of where the draft money goes in the interim makes sense to me.

You a banker then? (..... I know thats nearly a pejorative term at this stage ;-) )
 
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