30198 Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices

1 In addition, the Basle Committee’s Core

Principles requires that transactions between banks

and related companies and individuals should be

on an arm’s length basis, be effectively monitored,

and appropriate steps should be taken to mitigate

risks. Core Principles for Effective Banking

Supervision, Basle Committee on Banking

Supervision, September 1997. 2 12 U.S.C. 1468.

FEDERAL RESERVE SYSTEM

[Docket No. R–1106]

Policy Statement on Payments System

Risk Interaffiliate Transfers

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Policy statement.

SUMMARY: The Board is rescinding

section I.F., entitled Interaffiliate

Transfers, of its payments system risk

(PSR) policy. The Board adopted the

interaffiliate transfer policy in 1987 to

address potential risks resulting from a

lack of an arm’s-length credit decision

among affiliates.

EFFECTIVE DATE: January 1, 2002.

FOR FURTHER INFORMATION CONTACT: Paul

Bettge, Associate Director (202/452–

3174) or Stacy Coleman, Manager (202/

452–2934), Division of Reserve Bank

Operations and Payment Systems.

SUPPLEMENTARY INFORMATION: The Board

is issuing this notice in conjunction

with five other notices requesting

comment on the PSR policy. Three nearterm proposals concern the net debit

cap calculation for U.S. branches and

agencies of foreign banks (Docket No. R–

1108), modifications to the procedures

for posting electronic check

presentments to depository institutions’

Federal Reserve accounts for purposes

of measuring daylight overdrafts (Docket

No. R–1109), and the book-entry

securities transfer limit (Docket No. R–

1110). In addition, the Board is

requesting comment on the benefits and

drawbacks to several potential longerterm changes to the Board’s policy,

including lowering self-assessed net

debit caps, eliminating the two-week

average caps, implementing a two-tiered

pricing system for collateralized and

uncollateralized daylight overdrafts, and

rejecting payments with settlement-day

finality that would cause an institution

to exceed its daylight overdraft capacity

level (Docket No. R–1111). The Board is

also issuing today an interim policy

statement and requesting comment on

the broader use of collateral for daylight

overdraft purposes (Docket No. R–1107).

Furthermore, to reduce burden

associated with the PSR policy, the

Board recently rescinded the third-party

access policy (Docket No. R–1100).

I. Background

In April 1985, the Board adopted the

PSR policy to reduce the risks that largedollar payments systems presented to

the Federal Reserve Banks, to the

banking system, and to other sectors of

the economy (50 FR 21120, May 22,

1985). An integral component of this

policy is a program to control the use of

intraday Federal Reserve credit,

commonly referred to as daylight

overdrafts. The PSR policy establishes

maximum limits (net debit caps) on

daylight overdrafts in depository

institutions’ accounts at Federal Reserve

Banks.

At the time it adopted the PSR policy,

the Board also explored allowing

depository institutions affiliated

through common holding company

ownership to consolidate their Fedwire

activity and net debit caps for the

purpose of monitoring compliance with

the PSR policy. The Board determined,

however, that while the operations of

some holding companies are centrally

managed, the regulatory and

supervisory framework within which

their subsidiaries operate is based on

the separate corporate charter of each

subsidiary. Therefore, the PSR policy

requires that depository institutions be

monitored for compliance on a separate

legal-entity basis.

Although the Board prohibited

affiliated depository institutions from

outright consolidation of their Fedwire

activity and net debit caps, a depository

institution could simulate consolidation

by sending Fedwire funds transfers to

an affiliated institution in amounts not

to exceed its net debit cap. The

institution would have to repay the

funds before the end of the day. The

Board, however, identified two potential

risks associated with depository

institutions transferring their net debit

caps to affiliated institutions: Increased

credit risk to the Federal Reserve Banks

and systemic risk among affiliated

depository institutions, resulting from a

lack of an arm’s-length relationship

among affiliates. The Board believed

that this lack of an arm’s-length

relationship among affiliates, in some

cases, might weaken the independence

of credit judgment exercised by one

affiliate in advancing funds to another.

The concern that common ownership

erodes an arm’s-length credit decision

grew out of the bank failures in the

1930s, which pointed to the relationship

between depository institutions and

their affiliates as a source of instability

for the depository institutions.1

To address these risks, the Board

modified the PSR policy in 1987 to

permit interaffiliate transfers that are

intended to concentrate the daylight

overdraft capacity of affiliated

institutions in one or more institutions

provided that: (1) Each sending

institution’s board of directors

specifically approves, at least once each

year, the intraday extension of credit to

the specified affiliate(s) and sends a

copy of the directors’ resolution to its

Federal Reserve Bank and (2) during

regular examination, each sending

institution’s primary federal supervisor

reviews the timeliness of board-ofdirectors resolutions, the establishment

by the institution of limits on credit

extensions to each affiliate, the

establishment by the institution of

controls to ensure that credit extensions

stay within such limits, and whether

credit extensions have in fact stayed

within those limits (52 FR 29255,

August 6, 1987).

II. Discussion

Recognizing that significant changes

have occurred in the banking, payments,

and regulatory environment in the past

few years, the Board decided to conduct

a broad review of the Federal Reserve’s

daylight credit policies. As part of its

review, the Board considered the

effectiveness of the interaffiliate transfer

policy. Because of the policy’s limited

use and the credit risk management

techniques available to the Reserve

Banks, the Board decided to rescind the

policy.

The Board evaluated the interaffiliate

transfer policy’s effectiveness and found

that very few institutions are using

interaffiliate transfers to consolidate

their Fedwire activity and daylight

overdraft capacity. The Board also notes

that those institutions engaging in

interaffiliate transfers, primarily insured

depository institutions owned by the

same bank holding company, appear to

be managing their Federal Reserve

accounts prudently. In addition,

subsequent to the adoption of the

interaffiliate transfer policy, the

Financial Institutions Reform, Recovery,

and Enforcement Act of 1989 included

a cross-guarantee provision that allows

the Federal Deposit Insurance

Corporation (FDIC) to recover part of its

resolution cost by seeking

reimbursement from affiliated

institutions.2 The Board notes that,

under the cross-guarantee provisions, an

insured depository institution is

generally liable for any loss incurred by

the FDIC in connection with the default

of a commonly controlled insured

depository institution. Furthermore, the

Federal Reserve Banks retain the right to

reduce or eliminate the credit exposure

that they will accept for any depository

Federal Register / Vol. 66, No. 108 / Tuesday, June 5, 2001 / Notices 30199

3 12 U.S.C. 371c.

4The current part I, section G of the policy,

Monitoring, will be designated as section F.

institution by reducing the institution’s

net debit cap or monitoring the

institution’s Fedwire funds transfers

and enhanced net settlement

transactions in real time. The Board

believes that these controls mitigate any

increased credit risk to the Federal

Reserve or systemic risk from

interaffiliate transfers intended to

simulate daylight overdraft cap

consolidation.

The Board also believes that any

institution-specific supervisory

concerns associated with interaffiliate

credit extensions are more appropriately

addressed through the existing

supervisory process, including through

regulatory restrictions on interaffiliate

transactions embodied in sections 23A

and 23B of the Federal Reserve Act.3

Sections 23A and 23B of the Federal

Reserve Act are intended to limit the

risks to an insured depository

institution from transactions with its

affiliates. In May 2001, the Board

published an interim final rule that (1)

requires, under section 23A, that

institutions establish and maintain

policies and procedures to manage the

credit exposure arising from the

institutions’ intraday extensions of

credit to affiliates and (2) clarifies that

intraday extensions of credit by an

insured depository institution to an

affiliate are subject to the market terms

requirement of section 23B (Docket No.

R–1104).

The Board notes that the interim rule

under sections 23A and 23B could

restrict the ability of depository

institutions to consolidate their daylight

overdraft caps. Because of statutory

exemptions, however, the market terms

requirement of section 23B and the

policies and procedures requirement of

the interim rule generally would not

apply to intraday credit extensions

between affiliated insured depository

institutions. Thus, intraday credit

extensions between affiliated depository

institutions, including the consolidating

transfers discussed above, would

generally be permissible under sections

23A and 23B provided they are

conducted in a safe and sound manner.

On the other hand, intraday credit

extensions designed to transfer the

daylight overdraft cap of an insured

depository institution to an affiliate that

is not an insured depository institution,

such as a branch or agency of a foreign

bank affiliate, would be subject to the

market terms requirement of section 23B

and the policies and procedures

requirement of the interim rule.

Because the risks addressed by the

interaffiliate transfer policy are

appropriately addressed through the

existing supervisory process, the Board

is rescinding the interaffiliate transfer

policy, part I, section F of the Policy

Statement on Payments System Risk.4

Upon rescission of the interaffiliate

transfer policy, depository institutions

will no longer be required to submit a

board-of-directors resolution to their

Reserve Banks; however, institutions are

expected to comply with supervisory

and regulatory requirements regarding

affiliate relationships and exposures,

including sections 23A and 23B, as

described in 12 CFR 250.248, 12 CFR

Part 223, and any future rulemaking.

By order of the Board of Governors of the

Federal Reserve System, May 30, 2001.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 01–13977 Filed 6–4–01; 8:45 am]

BILLING CODE 6210–01–P

FEDERAL RESERVE SYSTEM

[Docket No. R–1107]

Policy Statement on Payments System

Risk

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Interim policy statement with

request for comment.

SUMMARY: The Board is issuing and

requesting comment on an interim

policy statement that allows a

depository institution that has a selfassessed net debit cap (average, above

average, or high) to pledge collateral to

its Federal Reserve Bank in order to

access additional daylight overdraft

capacity above its net debit cap level.

The Board may modify the final policy

statement after considering the

comments received.

DATES: The interim policy statement is

effective on May 30, 2001. Comments on

the interim policy must be received by

August 6, 2001.

ADDRESSES: Comments, which should

refer to Docket No. R–1107, may be

mailed to Ms. Jennifer J. Johnson,

Secretary, Board of Governors of the

Federal Reserve System, 20th and C

Streets, NW., Washington, DC 20551 or

mailed electronically to

regs.comments@federalreserve.gov.

Comments addressed to Ms. Johnson

also may be delivered to the Board’s

mailroom between 8:45 a.m. and 5:15

p.m. and to the security control room

outside of those hours. Both the

mailroom and the security control room

are accessible from the courtyard

entrance on 20th Street between

Constitution Avenue and C Street, NW.

Comments may be inspected in Room

MP–500 between 9 a.m. and 5 p.m.

weekdays, pursuant to § 261.12, except

as provided in § 261.14, of the Board’s

Rules Regarding Availability of

Information, 12 CFR 261.12 and 261.14.

FOR FURTHER INFORMATION CONTACT: Paul

Bettge, Associate Director (202/452–

3174) or Stacy Coleman, Manager (202/

452–2934), Division of Reserve Bank

Operations and Payment Systems.

SUPPLEMENTARY INFORMATION: This is

one of five notices regarding payments

system risk that the Board is issuing for

public comment today. Three near-term

proposals concern the net debit cap

calculation for U.S. branches and

agencies of foreign banks (Docket No. R–

1108), modifications to the procedures

for posting electronic check

presentments to depository institutions’

Federal Reserve accounts for purposes

of measuring daylight overdrafts (Docket

No. R–1109), and the book-entry

securities transfer limit (Docket No. R–

1110). In addition, the Board is

requesting comment on the benefits and

drawbacks to several potential longerterm changes to the Board’s payments

system risk (PSR) policy, including

lowering self-assessed net debit caps,

eliminating the two-week average caps,

implementing a two-tiered pricing

system for collateralized and

uncollateralized daylight overdrafts, and

rejecting payments with settlement-day

finality that would cause an institution

to exceed its daylight overdraft capacity

level (Docket No. R–1111). Furthermore,

to reduce burden associated with the

PSR policy, the Board recently

rescinded the interaffiliate transfer

(Docket No. R–1106) and third-party

access policies (Docket No. R–1100).

The Board requests that in filing

comments on these proposals,

commenters prepare separate letters for

each proposal, identifying the

appropriate docket number on each.

This will facilitate the Board’s analysis

of all comments received.

I. Background

Beginning in 1985, the Board adopted

and has subsequently modified a policy

to reduce the risks that payments

systems present to the Federal Reserve

Banks, to the banking system, and to

other sectors of the economy. An

integral component of the current PSR

policy is a program to control

depository institutions’ use of intraday

Federal Reserve credit, commonly

referred to as ‘‘daylight credit’’ or

‘‘daylight overdrafts.’’ The Board’s