Indemnification for Losses on Substitute Checks

B

The correct answer to the question is B. Substitute check.

Under Regulation CC, which is a federal regulation governing funds availability for deposit accounts, banks are required to make funds deposited by check available for withdrawal within a certain period of time. In order to expedite the processing of checks and reduce costs associated with physically transporting them, banks often convert paper checks into electronic items, such as images or data files. These electronic items are known as "substitute checks."

If a bank receives a returned check that is an electronic item and not a paper original, and the bank incurs losses as a result of indemnities it would be required to make under Regulation CC in connection with a substitute check later created from the returned check, the Reserve Bank will indemnify the bank. In other words, the Reserve Bank will assume responsibility for any losses that the bank incurs due to errors or problems with the substitute check that is created later.

However, it's important to note that the Reserve Bank will not be liable if the loss can be attributed to a lack of good faith or failure to exercise ordinary care on the part of any person who handled the item. This means that if the bank or any other party involved in processing the check did not follow proper procedures or failed to exercise reasonable care, and this caused the loss, the Reserve Bank will not be responsible for indemnifying the bank.