Question

Which of the following is true of a bank's duty to honor checks?

a. The drawee bank is not under a duty to honor all checks drawn by its customers in presence of sufficient funds in the customers' accounts.
b. If there are insufficient funds on deposit, the bank may charge the customer's account if it does not create an overdraft.
c. If a bank fails to honor a check because of a mistake on its part, the bank is liable to the customer for damages the customer suffers.
d. The drawee bank has a liability to the holder of the check, regardless of whether the check is certified.

Answer 1

A bank is liable to its customer for damages if it fails to honor a check due to its own mistake. Banks regard deposits as liabilities, and the Federal Reserve facilitates check processing, transferring funds between accounts.

Step-by-step explanation:

The correct answer to the question of a bank's duty to honor checks is: c. If a bank fails to honor a check because of a mistake on its part, the bank is liable to the customer for damages the customer suffers. This is because when customers deposit money into a financial institution, such as in a checking account, savings account, or a certificate of deposit, it represents a liability for the bank. The bank has an obligation to return these funds on the account holders' demand. When you use a check for payment for goods and services, the store deposits the check in its bank account, which ultimately results in the transfer of funds from your bank account to the store's account as facilitated by the Federal Reserve's check processing system. If there are insufficient funds, banks generally will not honor the check and may charge a fee, but they cannot create an overdraft unless previously arranged. The bank does not have an automatic liability to the check holder unless the check is certified.