Federal Register / Vol. 73, No. 46 / Friday, March 7, 2008 / Notices 12417 

include a proposed timetable as 

described above. 

Federal Communications Commission. 

Marlene H. Dortch, 

Secretary. 

[FR Doc. E8–4597 Filed 3–6–08; 8:45 am] 

BILLING CODE 6712–01–P 

FEDERAL HOUSING FINANCE BOARD 

Sunshine Act Meeting Notice; 

Announcing a Partially Open Meeting 

of the Board of Directors 

TIME AND DATE: The open meeting of the 

Board of Directors is scheduled to begin 

at 10 a.m. on Wednesday, March 12, 

2008. The closed portion of the meeting 

will follow immediately the open 

portion of the meeting. 

PLACE: Board Room, First Floor, Federal 

Housing Finance Board, 1625 Eye 

Street, NW., Washington, DC 20006. 

STATUS: The first portion of the meeting 

will be open to the public. The final 

portion of the meeting will be closed to 

the public. 

MATTER TO BE CONSIDERED AT THE OPEN

PORTION: Appointment to the Office of 

Finance Board of Directors. 

MATTER TO BE CONSIDERED AT THE CLOSED

PORTION: Periodic Update of 

Examination Program Development and 

Supervisory Findings. 

FOR FURTHER INFORMATION CONTACT: 

Shelia Willis, Paralegal Specialist, 

Office of General Counsel, at 202–408–

2876 or williss@fhfb.gov. 

Dated: March 4, 2008. 

By the Federal Housing Finance Board. 

Neil R. Crowley, 

Acting General Counsel. 

[FR Doc. 08–992 Filed 3–5–08; 2:29 pm] 

BILLING CODE 6725–01–P 

FEDERAL RESERVE SYSTEM 

Formations of, Acquisitions by, and 

Mergers of Bank Holding Companies 

The companies listed in this notice 

have applied to the Board for approval, 

pursuant to the Bank Holding Company 

Act of 1956 (12 U.S.C. 1841 et seq.) 

(BHC Act), Regulation Y (12 CFR Part 

225), and all other applicable statutes 

and regulations to become a bank 

holding company and/or to acquire the 

assets or the ownership of, control of, or 

the power to vote shares of a bank or 

bank holding company and all of the 

banks and nonbanking companies 

owned by the bank holding company, 

including the companies listed below. 

The applications listed below, as well 

as other related filings required by the 

Board, are available for immediate 

inspection at the Federal Reserve Bank 

indicated. The applications also will be 

available for inspection at the offices of 

the Board of Governors. Interested 

persons may express their views in 

writing on the standards enumerated in 

the BHC Act (12 U.S.C. 1842(c)). If the 

proposal also involves the acquisition of 

a nonbanking company, the review also 

includes whether the acquisition of the 

nonbanking company complies with the 

standards in section 4 of the BHC Act 

(12 U.S.C. 1843). Unless otherwise 

noted, nonbanking activities will be 

conducted throughout the United States. 

Additional information on all bank 

holding companies may be obtained 

from the National Information Center 

website at www.ffiec.gov/nic/. 

Unless otherwise noted, comments 

regarding each of these applications 

must be received at the Reserve Bank 

indicated or the offices of the Board of 

Governors not later than April 3, 2008. 

A. Federal Reserve Bank of Kansas 

City (Todd Offenbacker, Assistant Vice 

President) 925 Grand Avenue, Kansas 

City, Missouri 64198–0001: 

1. Grant County Bank Employee Stock 

Ownership Plan, to acquire an 

additional 2.13 percent of the voting 

shares of Resource One, Inc., and 

thereby indirectly acquire voting shares 

of Grant County Bank, all of Ulysses, 

Kansas. 

Board of Governors of the Federal Reserve 

System, March 4, 2008. 

Margaret McCloskey Shanks, 

Associate Secretary of the Board. 

[FR Doc. E8–4487 Filed 3–6–08; 8:45 am] 

BILLING CODE 6210–01–S 

FEDERAL RESERVE SYSTEM 

[Docket No. OP–1309] 

Policy on Payments System Risk 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Policy statement; request for 

comment. 

SUMMARY: The Board of Governors of the 

Federal Reserve System (Board) requests 

comment on proposed changes to its 

Payments System Risk (PSR) policy that 

would adopt a new strategy for 

providing intraday balances and credit 

to depository institutions and encourage 

such institutions to collateralize their 

daylight overdrafts. The Board believes 

changes to the Federal Reserve’s current 

strategy for providing intraday balances 

and credit to the banking industry 

would help loosen liquidity constraints 

and reduce operational risk. 

Specifically, the Board proposes to 

adopt a policy of supplying intraday 

balances to healthy depository 

institutions predominantly through 

explicitly collateralized daylight 

overdrafts provided at a zero fee. The 

Board would allow depository 

institutions to pledge collateral 

voluntarily to secure daylight overdrafts 

but would encourage the voluntary 

pledging of collateral to cover daylight 

overdrafts by raising the fee for 

uncollateralized daylight overdrafts to 

50 basis points (annual rate) from the 

current 36 basis points. The Board also 

proposes to increase the biweekly 

daylight overdraft fee waiver to $150 

from $25 to minimize the effect of the 

proposed policy changes on institutions 

that use small amounts of daylight 

overdrafts (small users). In addition, the 

proposed policy would involve changes 

to other elements of the PSR policy 

dealing with daylight overdrafts, 

including adjusting net debit caps, 

streamlining maximum daylight 

overdraft capacity (max cap) procedures 

for certain foreign banking organizations 

(FBOs), eliminating the current 

deductible for daylight overdraft fees, 

and increasing the penalty daylight 

overdraft fee for ineligible institutions to 

150 basis points (annual rate) from the 

current 136 basis points. 

DATES: Comments must be received on 

or before June 4, 2008. 

ADDRESSES: You may submit comments, 

identified by Docket No. OP–1309, by 

any of the following methods: 

• Agency Web Site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: regs.comments@federal

reserve.gov. Include the docket number 

in the subject line of the message. 

• Fax: (202) 452–3819 or (202) 452–

3102. 

• Mail: Address to Jennifer J. Johnson, 

Secretary, Board of Governors of the 

Federal Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments will be made 

available on the Board’s Web site at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm as 

submitted, unless modified for technical 

reasons. Accordingly, comments will 

not be edited to remove any identifying 

or contact information. Public 

comments may also be viewed 


sroberts on PROD1PC70 with NOTICES
12418 Federal Register / Vol. 73, No. 46 / Friday, March 7, 2008 / Notices 

1See 71 FR 35679, June 21, 2006. 

2Copies of all public comments on the 

consultation paper can be found on the Board’s 

website at http://www.federalreserve.gov/ 

generalinfo/foia/ 

index.cfm?doc_id=OP%2D1257&doc_ver=1. 

3Payment queuing is a tool used by some 

depository institutions to hold a payment internally 

until sufficient funds—available balances or credit 

line—become available to send the payment to the 

Fedwire funds transfer system or another system. 

Some payments are held in queues because a 

customer has insufficient balances or credit to fund 

the payments. Other payments may be held to 

manage the level of account daylight overdrafts at 

the Reserve Bank or the associated fees. 

4CHIPS is a real-time final payments system 

operated by The Clearing House Payments 

Company. In January 2001, The Clearing House 

implemented operational and rule changes to allow 

all transactions settled in CHIPS to be final upon 

release from a central queuing system. DTC is a 

subsidiary of the Depository Trust and Clearing 

Corporation, which operates six subsidiaries that 

provide clearance, settlement, and information 

services for many financial instruments, including 

equities, corporate and municipal bonds, 

government and mortgage-backed securities, money 

market instruments, and over-the-counter 

derivatives. DTC provides custody and settlement 

services for corporate and municipal securities and 

money market instruments. DTC is a member of the 

Federal Reserve System and a clearing agency 

registered with the Securities and Exchange 

Commission. 

5 In 2001, the Board requested comment on twotier pricing as a long-term PSR policy direction and, 

based on comments, agreed to continue evaluating 

the benefits and drawbacks of implementing such 

a regime. See 66 FR 30208, June 5, 2001 and 67 FR 

54424, August 22, 2002. 

electronically or in paper in Room MP–

500 of the Board’s Martin Building (20th 

and C Streets, NW.) between 9 a.m. and 

5 p.m. on weekdays. 

FOR FURTHER INFORMATION CONTACT: 

Jeffrey Marquardt, Deputy Director 

(202–452–2360) or Susan Foley, 

Assistant Director (202–452–3596), 

Division of Reserve Bank Operations 

and Payment Systems, Board of 

Governors of the Federal Reserve 

System; for users of 

Telecommunications Device for the Deaf 

(‘‘TDD’’) only, contact (202) 263–4869. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The Federal Reserve’s Payments 

System Risk (PSR) policy sets out the 

general public policy objectives of safety 

and efficiency for payments and 

settlement systems. Over the past few 

years, the Federal Reserve has been 

reviewing the long-term effects of 

market, operational, and policy changes 

by the financial industry and the 

Federal Reserve on intraday liquidity, 

operational, and associated credit risks 

in financial markets and the payments 

system, including account overdrafts 

(daylight overdrafts) at the Federal 

Reserve Banks (Reserve Banks). On June 

21, 2006, the Board published for public 

comment the Consultation Paper on 

Intraday Liquidity Management and the 

Payments System Risk Policy 

(consultation paper) that sought 

information from financial institutions 

and other interested parties on their 

experience in managing liquidity, 

operational, and credit risks related to 

Fedwire funds transfers, especially lateday transfers.1 The paper included a list 

of detailed objectives relating to safety 

and efficiency that the Board has 

previously used to conduct payments 

system risk analysis. An important goal 

of the consultation process was to 

identify opportunities to improve the 

safety/efficiency trade-offs in the 

payments system over the long run. 

Significant changes to U.S. payments 

and settlement systems over the past 

twenty-five years have helped reduce 

systemic risk. In accord with U.S. and 

international risk policies and 

standards, several of these changes have 

relied increasingly on the use of central 

bank money—in this context, balances 

that financial institutions and private 

clearing and settlement organizations 

hold in accounts at Reserve Banks—to 

strengthen the management of credit 

and liquidity risk in private-sector 

clearing and settlement arrangements. 

Such changes have had the effect of 

increasing significantly the intraday 

demand for central bank money and 

hence the demand for daylight 

overdrafts at the Reserve Banks, which 

are a major source of these funds. 

In addition, the combined effect of 

depository institutions’ intraday 

liquidity management strategies, 

changes at clearing and settlement 

organizations, and late-day market 

activity has been to shift the sending of 

larger Fedwire funds transfers to later in 

the day. From an operational risk 

perspective, delaying the sending of 

large payments until late in the day 

increases the potential magnitude of 

liquidity dislocation and risk in the 

financial industry if late-in-the-day 

operational disruptions should occur. 

An increase in such risk is particularly 

troublesome in an era of heightened 

concern about operational disruptions 

generally. 

Given the growing demand for 

intraday central bank money and 

accompanying daylight overdrafts, as 

well as the shift of larger Fedwire 

payments to later in the day, the Board 

believes that significant further steps are 

appropriate to mitigate the growing 

credit exposures of the Reserve Banks, 

while also improving intraday liquidity 

management for the banking system and 

augmenting liquidity provided. The 

consultation paper requested views on 

potential changes in market practices, 

operations, and the Federal Reserve’s 

PSR policy that could reduce liquidity, 

operational, and credit risks. These 

proposed changes would not affect the 

provisions of part I of the PSR policy, 

which deal with risk management in 

private-sector systems. 

II. Comments and Analysis 

The Board received twenty-three 

public comment letters in response to 

its consultation paper.2 The majority of 

these letters were from commercial 

banking organizations and from several 

private-sector clearing and settlement 

systems, industry groups, and trade 

organizations. In addition, the Board 

received comments from one Reserve 

Bank and one individual. Almost all 

commenters explicitly expressed 

concern about the operational risk 

associated with the increasing 

concentration of late-day payments. 

Most commenters identified payment 

queuing at depository institutions, 

particularly the queuing of payments to 

settle large money market transactions, 

as a liquidity conservation strategy that 

contributes to institutions sending 

payments late in the day.3 A majority of 

commenters also agreed that some 

private-sector clearing and settlement 

systems absorb a considerable amount 

of intraday liquidity in connection with 

their risk-management processes. 

Further, some commenters identified 

market constraints, such as the late-day 

settlements of tri-party repo 

transactions, and the processes and 

settlement procedures of The Depository 

Trust Company (DTC) and The Clearing 

House Interbank Payment System 

(CHIPS) as important contributors to the 

concentration of late-day payments.4

The comments also addressed the 

specific market, operational, and PSR 

policy options set forth in the 

consultation paper. The majority of 

commenters strongly supported greater 

use of collateral and two-tiered pricing 

of daylight overdrafts by the Federal 

Reserve under the PSR policy.5 Several 

institutions expressed strong support for 

a zero fee for collateralized daylight 

overdrafts, similar to policies followed 

by other central banks. Most 

commenters also stressed that they 

should have the ability to use 

unencumbered collateral already 

pledged to the discount window to 

support their daylight overdrafts. 

Several commenters also strongly 

supported continued work on potential 

opportunities to conserve liquidity 

within DTC and CHIPS. These 

comments endorsed the work performed 

by the Federal Reserve Bank of New 


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Federal Register / Vol. 73, No. 46 / Friday, March 7, 2008 / Notices 12419 

6The Payment Risk Committee (PRC) is 

sponsored by the Federal Reserve Bank of New 

York and works to identify and analyze issues of 

mutual interest related to risk in payments and 

settlement. The institutions represented on the PRC 

include Bank of America, Bank of New York, Bank 

of Tokyo-Mitsubishi UFJ, Citibank, Deutsche Bank, 

HSBC, JPMorgan Chase, State Street, UBS, 

Wachovia, and Wells Fargo. The Wholesale 

Customer Advisory Group (WCAG) advises the 

Wholesale Product Office on business issues and is 

composed of depository institutions that are major 

users of Fedwire. Institutions represented on this 

group include ABN AMRO, Bank of America, Bank 

of New York, Citibank, Deutsche Bank, HSBC, 

JPMorgan Chase, Key Bank, Mellon Financial, State 

Street, SunTrust, UBS, U.S. Bank, U.S. Central 

Credit Union, Wachovia, and Wells Fargo. 

7The creation of a liquidity-saving mechanism 

could involve adding new features to the Fedwire 

funds transfer system that depository institutions 

could use to coordinate better the timing and 

settlement of their payments as well as to 

economize on the use of intraday central bank 

money, daylight overdrafts, and collateral. The 

existing real-time gross settlement functionality of 

Fedwire would be retained. In particular, a 

depository institution could still designate that a 

Fedwire funds transfer settle immediately as it does 

today. The new features, for example, could allow 

depository institutions to designate certain types of 

payments, possibly including payments generated 

by certain types of transactions, to be placed into 

a central queuing system and settled using 

algorithms that allow the liquidity provided by 

incoming payments to a depository institution to be 

used as far as possible to settle that institution’s 

outgoing payments. 

8 Versions of liquidity-saving mechanisms are 

used by CHIPS and Target 2 in the European Union. 

Such features will also be included in the new wire 

transfer systems in Japan and other countries. 

9 In 2001, the Board modified the criteria to 

determine eligible capital and raised the percent of 

capital used in calculating net debit caps and the 

deductible. The percent of capital used increased 

from as much as 10 percent to up to 35 percent. See 

also 66 FR 30205, June 5, 2001. 

York’s Payment Risk Committee (PRC) 

and Wholesale Customer Advisory 

Group (WCAG) during the consultation 

period. The PRC and WCAG conducted 

a liquidity survey to understand better 

the determinants of late-day payments.6

The results of the survey prompted the 

formation of four workgroups to 

evaluate liquidity improvement 

opportunities for CHIPS, DTC, tri-party 

repo payments, and broker-dealer 

payments. 

The workgroup focused on CHIPS 

processing found that the CHIPS 

algorithm can leave a number of largevalue payments unresolved in the 

system for significant periods of time, 

resulting in some institutions 

redirecting payments to the Fedwire 

funds transfer system at the end of the 

day; these payments are in addition to 

the daily Fedwire funds transfers that 

are part of the CHIPS’ end-of-day 

funding procedures around 5:15 p.m. 

The workgroup and CHIPS identified 

possible opportunities to release 

unresolved payments for settlement 

earlier, including changing some of the 

system controls. The workgroup that 

focused on DTC largely examined the 

money market instrument clearing and 

settlement processes and the reasons a 

substantial amount of liquidity is 

transferred to and remains at DTC, 

especially between 1 and 3 p.m. This 

liquidity is then released as part of 

settlement around 4:30 p.m. The 

workgroup and DTC tried to identify 

ways to reduce the length of time of the 

settlement process, to encourage 

institutions to manage better liquidity at 

DTC, and to enhance operations and 

certain controls. The other two 

workgroups on broker-dealer payments 

and on tri-party payments largely 

focused on documenting processes and 

procedures to educate the PRC and 

WCAG members so they could better 

understand why these payments are key 

determinants of late-in-the-day 

payments. The results from each of the 

workgroups were shared as part of the 

comment process and were cited for 

continued work by commenters. 

Commenters were split in terms of 

support for developing a liquiditysaving mechanism for the Fedwire 

funds transfer system.7 Eight of the 

thirteen respondents that commented on 

the possible introduction of a liquiditysaving mechanism encouraged further 

exploration of this idea, while the 

remaining five expressed some 

concerns. Those respondents that were 

supportive noted that a liquidity-saving 

mechanism could help reduce the 

length of time that large-value payments 

sit in internal queues at depository 

institutions. One commenter 

specifically suggested that the Federal 

Reserve focus on a liquidity-saving 

system for the exchange of broker-dealer 

and tri-party repo payments, which are 

typically large-value payments. Other 

supporters strongly favored a 

centralized queuing system for all 

Fedwire funds transfer payments and 

mentioned systems used or under 

development in other countries.8

Concerns about developing a liquiditysaving mechanism included the 

possibility that it could undermine the 

real-time gross settlement attribute of 

the Fedwire funds transfer system, 

create a competitive disadvantage for a 

private-sector payments system, or 

significantly increase the cost of making 

Fedwire funds transfer payments. 

Commenters had different views on 

the idea of time-of-day pricing, which 

would vary the fee charged for daylight 

overdrafts through the day so that 

overdrafts incurred earlier in the day 

would incur a lower fee than overdrafts 

incurred late in the day. While some 

commenters supported time-of-day 

pricing as an incentive to send funds 

transfers earlier in the day, others 

requested additional information about 

the idea. Still other commenters pointed 

out that the effectiveness of time-of-day 

pricing would be constrained by the 

reality of late afternoon trade 

settlements, such as tri-party repo 

payments and Fed funds loans. 

Commenters expressed limited or no 

support for the creation of an intraday 

market to exchange liquidity, an 

expansion of the market for early return 

of Fed funds loans, or throughput 

requirements for the Fedwire funds 

transfer system. Most respondents 

thought that an intraday market would 

not be helpful in addressing the late-day 

concentration of payments and would 

be costly and complex to establish. In 

terms of expanding the market for early 

return of Fed funds loans, several 

commenters were uncertain about the 

effects of such a change on late-day 

payments. In addition, a majority of 

respondents did not support the 

introduction of throughput 

requirements for the Fedwire funds 

transfer system, primarily because of the 

potential difficulty of administering and 

enforcing such requirements. 

Throughput requirements are used by 

some systems around the world to 

encourage certain percentages of 

payments volume to be submitted by 

predetermined times. Three 

commenters, however, were somewhat 

supportive provided the throughput 

requirements were voluntary, 

implemented jointly with a central 

queue, or in conjunction with brief, 

intermittent periods when institutions 

could coordinate sending Fedwire funds 

transfers. 

The Board received several comment 

letters raising concerns about the 

policy’s treatment of the daylight 

overdrafts of foreign banking 

organizations (FBOs). The commenters 

stated that the U.S. capital equivalency 

measure used to determine FBO net 

debit caps and deductibles in the 

calculation of daylight overdraft limits 

and fees is discriminatory and results in 

a competitive disadvantage for these 

organizations and in their delaying 

payments. This assertion is based on the 

fact that U.S.-chartered depository 

institutions receive a net debit cap and 

deductible based on their worldwide 

capital, while FBOs receive a net debit 

cap based on no more than 35 percent 

of their worldwide capital (referred to as 

the U.S. capital equivalency) and a 

deductible based on their U.S. capital 

equivalency.9 As a result, FBOs are 


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12420 Federal Register / Vol. 73, No. 46 / Friday, March 7, 2008 / Notices 

10For an FBO, the policy incorporates the SOSA 

rankings and FHC status in determining U.S. capital 

equivalency. The SOSA ranking is composed of 

four factors, including the FBO’s financial 

condition and prospects, the system of supervision 

in the FBO’s home country, the record of the home 

country’s government in support of the banking 

system or other sources of support for the FBO; and 

transfer risk concerns. The SOSA ranking is based 

on a scale of 1 through 3, with 1 representing the 

lowest level of supervisory concern. 

11Currently FedACH credit transfer and debit 

transfer transactions post at 8:30 a.m. and 11 a.m. 

eastern time, respectively. 

12All times referenced are eastern time. 

13See the Policy on Payment System Risk 

http://www.federalreserve.gov/paymentsystems/psr/ 

policy07.pdf, pg. 2. 

14Please see appendix I for a full discussion of 

these issues. 

eligible for considerably lower daylight 

overdraft capacity and free intraday 

credit than are U.S.-chartered 

depository institutions with equivalent 

worldwide capital. The commenters 

asked the Board to calculate FBO 

deductibles using 100 percent of their 

worldwide capital, as is done for U.S.- 

chartered institutions. The commenters 

also asserted that the existing formula 

used to determine the net debit cap 

cannot be justified, particularly in the 

case of FBOs which are considered to be 

both ‘‘well capitalized’’ and ‘‘well 

managed’’ for U.S. regulatory (FHC) 

purposes or which have received the 

highest rated ‘‘strength-of-support 

assessment’’ (SOSA 1).10

Finally, the Board received a few 

other comments. One responder 

suggested changing the posting rules for 

automated clearinghouse (ACH) debit 

transfers so that settlements from credit 

and debit transfers are posted 

simultaneously with only the net 

amount of funds increasing or 

decreasing the balances of depository 

institutions held at Reserve Banks.11

The Board has issued a separate Federal 

Register notice requesting comment on 

shifting from 11 a.m. to 8:30 a.m., 

eastern time, the posting time for 

commercial and government ACH debit 

transfers that are processed by the 

Reserve Banks’ FedACH service.12 The 

earlier posting time would make the 

postings of commercial and government 

ACH debit and credit transfers 

simultaneous. 

Some commenters raised ideas for 

changes other than those suggested in 

the consultation paper, including 

lowering fees for securities-related 

daylight overdrafts, allowing individual 

banks to coordinate informally the 

sending of Fedwire funds transfers, and 

reducing the maximum payment size 

allowed through the Fedwire funds 

transfer system. Finally, several 

commenters addressed a question in the 

consultation paper about the payment of 

interest on reserves and the possible 

effect on depository institutions’

intraday liquidity management. Most 

responders believed that the Federal 

Reserve’s payment of interest on reserve 

balances would not affect intraday 

liquidity management or stated that its 

effect on liquidity was unknown 

without further information. 

Overall, the public comment letters 

and the extensive PRC and WCAG 

investigations into intraday liquidity 

and late-day payments issues validate a 

number of concerns raised in the 

consultation paper. It has also become 

clear that no single policy or operational 

change would address all of the intraday 

liquidity, risk, and payments issues that 

the Board and the industry have 

identified. However, a series of steps by 

both the private sector and the Federal 

Reserve could help. 

To address the combination of 

intraday liquidity, operational, and 

credit risks in the wholesale payments 

system, the Board believes that the 

Federal Reserve and industry should 

pursue a four-pronged strategy. The 

Board should review its PSR policy and 

consider adjusting the terms and pricing 

of daylight overdrafts. The Reserve 

Banks should work with the industry 

and investigate options for developing a 

liquidity-saving mechanism for the 

Fedwire funds transfer system. 

Additionally, working with the PRC, 

CHIPS and The Depository Trust and 

Clearing Corporation should explore 

opportunities for improving payments 

processing and liquidity use in their 

systems and processes relating to largevalue funds and securities settlement, 

respectively. This request for comment 

focuses on the Board’s PSR policy and 

recommends changes in strategy, terms, 

and pricing for the provision of intraday 

credit by the Reserve Banks. 

III. New Strategy for PSR Policy 

The current policy of providing 

uncollateralized daylight overdrafts at 

an administered fee grew out of a Board 

study in the late 1980s that reviewed 

options for reducing the volume of 

intraday credit provided by the Reserve 

Banks. A fundamental premise of this 

work was that intraday credit is a 

necessary but undesirable aspect of the 

payments system and should be reduced 

whenever possible. This premise is 

expressed in the introduction to the 

current PSR policy as follows: 

[T]he Board expects depository institutions 

to manage their Federal Reserve accounts 

effectively and minimize their use of Federal 

Reserve daylight credit. Although some 

intraday credit may be necessary, the Board 

expects that, as a result of this policy, 

relatively few institutions will consistently 

rely on intraday credit supplied by the 

Federal Reserve to conduct their business.13

In reviewing the current PSR policy, 

the Board identified five major concerns 

related to risk and efficiency that 

together suggest that a change in the 

Federal Reserve’s approach to the 

provision of daylight overdrafts is 

warranted at this time.14 First, the data 

indicate a long-term trend of declining 

end-of-day balances held in Federal 

Reserve accounts which, in turn, 

implies an increasing need by 

institutions for daylight credit from the 

Reserve Banks to fund payments-system 

transactions. Second, the Board notes 

that some financial utilities can absorb 

large amounts of intraday funding from 

participants to meet their risk 

management requirements. These 

funding requirements result in large 

transfers of balances from participants’

Federal Reserve accounts that often are 

not reversed until the late afternoon. 

Third, data, as well as comments on the 

consultation paper, make clear that 

many large depository institutions hold 

a significant number of large-value 

payments in ‘‘liquidity queues’’

primarily to avoid daylight overdraft 

fees; such queuing can delay payments 

across the financial markets. Fourth, 

data show that Reserve Banks’ credit 

exposure has increased over time in real 

terms despite Reserve Banks charging 

fees. On certain days, the peak overdraft 

of the banking system can exceed $210 

billion. In 2007, the average daily 

overdraft of the banking system as a 

whole was approximately $60 billion 

and the average daily peak overdraft 

was approximately $160 billion. Finally, 

daylight overdraft fees paid by the 

banking system have continued to rise, 

increasing the cost burden of the PSR 

policy on the industry. Daylight 

overdraft fees for 2007 totaled 

approximately $65 million, compared 

with $32.2 million in 2003. Because 

there are systemic reasons for the 

increased demand for intraday balances 

and credit as well as evidence that the 

current pricing approach is creating 

liquidity queues and increasing late-day 

operational risk, the Board concluded 

that its current strategy of seeking to 

minimize daylight overdrafts should be 

reassessed. 

The Board also notes that thinking 

about the role of central banks in 

providing intraday balances to the 

payments system has evolved 

significantly over the past twenty years. 


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Federal Register / Vol. 73, No. 46 / Friday, March 7, 2008 / Notices 12421 

15 ‘‘Because the settlement of each payment 

involves a direct transfer of the settlement asset, 

[real time gross settlement] systems require 

substantially more of the asset to ensure smooth 

payment flows. To enable this, most central banks 

provide intraday credit to banks participating in 

these systems in quantities which in some cases 

dwarf the banks’ overnight balances or their 

overnight borrowing from the central bank.’’ See 

‘‘The Role of Central Bank Money in the Payment 

System,’’ Committee on Payment and Settlement 

Systems, August 2003 at http://www.bis.org/publ/ 

cpss55.pdf. 

16The strategy is consistent with the public 

policy objectives in the current PSR policy to foster 

the safety and efficiency of payments and 

settlement systems as well as the version of these 

objectives used in developing the Board’s original 

pricing proposals in 1988. At that time, the safety 

objectives were stated as low direct credit risk to 

the Federal Reserve, low direct credit risk to the 

private sector, low systemic risk, and rapid final 

payments. The efficiency objectives were stated as 

a low operating expense of making payments, 

equitable treatment of all service providers and 

users in the payments system, effective tools for 

implementing monetary policy, and low transaction 

costs in the Treasury market. See ‘‘Controlling Risk 

in the Payment System,’’ Report of the Task Force 

on Controlling Payments System Risk to the 

Payments System Policy Committee of the Federal 

Reserve System, Board of Governors of the Federal 

Reserve System, August 1988. 

17See The Role of Central Bank Money in the 

Payment System, Committee on Payment and 

Settlement Systems, August 2003. (http:// 

www.bis.org/publ/cpss55.pdf). 

18Policy decisions that will be made to exercise 

the Federal Reserve’s new statutory authority to pay 

interest on reserves beginning in October 2011 

could increase the level of overnight balances held 

at the Reserve Banks and consequently reduce the 

demand for daylight overdrafts to provide intraday 

balances. 

19Pledging collateral is generally limited to 

securing maximum capacity (overdraft capacity 

above the net debit cap) or protecting Reserve Banks 

against risk from problem depository institutions. 

20Under Operating Circular 1, depository 

institutions also grant Reserve Banks a lien on 

certain assets to secure any obligation owing to any 

Reserve Bank: ‘‘To secure any overdraft in the 

master account, as well as any other obligation, now 

existing or arising in the future, of the account 

holder to any Reserve Bank, the account holder 

grants to the Reserve Bank all the account holder’s 

right, title, and interest in property, whether now 

owned or hereafter acquired, in the possession or 

control of, or maintained with, any Reserve Bank.’’

21The current cap is a function of qualifying 

capital, which varies based on the entity type. The 

qualifying capital is mutipled by the cap mutliplier 

for cap categories to determine each institution’s 

limit. One limit applies for single-day use and 

another for two-week average use, but these limits 

generally are not binding. If an institution exceeds 

its cap, the Reserve Bank will counsel the 

institution ex post. For additional information, see 

the Guide to the Federal Reserve’s Payments System 

Risk Policy at http://www.federalreserve.gov/ 

paymentsystems/psr/guide.pdf. 

A 2003 study by the G–10 Committee on 

Payments and Settlements Systems 

summarized this change in perspective 

and explicitly recognized that central 

banks have an important role in 

providing intraday (central bank money) 

balances to foster the smooth operation 

and settlement of payments systems.15

In essence, this view is an extension to 

the intraday market of the traditional 

role of central banks in supplying 

overnight balances to the banking 

industry to meet financial market 

demand for liquidity and operating 

balances. While some of the demand of 

the banking industry for intraday 

balances can be met by overnight 

balances, when the level of those 

balances is inadequate, a central bank 

will need to supply additional funds 

through the temporary provision of 

intraday funds, which could include 

using mechanisms such as daylight 

overdraft facilities. 

The Board believes that a new strategy 

would enhance intraday liquidity 

management while controlling risk to 

the Reserve Banks and would build on 

the Board’s 2001 proposal to consider 

two-tiered pricing for daylight 

overdrafts.16 This strategy would 

(1) Explicitly recognize that the 

Federal Reserve has an important role in 

providing intraday balances to foster the 

smooth operation of the payments 

system. 

(2) Provide temporary, intraday 

balances to healthy depository 

institutions predominantly through 

collateralized intraday overdrafts. 

(3) Reduce over time the reliance of 

the banking industry on 

uncollateralized daylight credit if this 

can be done without significantly 

disrupting the operation of the 

payments system or causing other 

unintended adverse consequences. 

In brief, the rationale for the new 

strategy is that modern payments and 

settlement systems, including Fedwire, 

CHIPS, CLS, and DTC, require 

significant amounts of intraday balances 

or liquidity for smooth operations and 

that the role of a central bank is to meet 

reasonable market needs of participants 

in these systems for this liquidity.17 In 

addition, under current policies, 

overnight balances are not sufficient to 

address these needs and, as a result, 

temporary, intraday balances through 

intraday credit must be provided by 

daylight overdrafts.18 Intraday credit is 

now widely and explicitly provided by 

central banks to support the operation of 

payments and settlement systems, 

including by the Eurosystem, Bank of 

Japan, and Bank of England. Typically 

this daylight credit is collateralized, but 

no fee is charged. 

The proposed new strategy would 

explicitly use collateral augmented by 

the framework of net debit caps to 

control credit risk to the Reserve Banks 

in providing daylight overdrafts and 

would link the fees charged for daylight 

overdrafts to the amount of collateral 

provided. The same collateral eligibility 

criteria and haircuts would be used for 

both overnight and intraday credit. 

Unencumbered collateral pledged for 

discount window or PSR purposes 

could be used to support intraday credit 

provided at the reduced daylight 

overdraft fee. The benefits of 

encouraging the pledge of collateral 

would extend beyond the reduced 

intraday credit exposure of the Reserve 

Banks and would include enhanced 

emergency preparedness. Under the 

proposed policy, eligible institutions 

would have an additional incentive to 

sign borrowing documents with the 

Reserve Banks and pledge collateral, 

which would enable such institutions to 

borrow from the discount window, if 

needed. 

Controlling credit risk by taking 

collateral is a time-honored riskmanagement technique. It is used 

explicitly in some cases today by the 

Reserve Banks in the daylight overdraft 

program.19 Moreover, under Operating 

Circular 10, depository institutions 

grant Reserve Banks a lien on collateral 

pledged to the Reserve Bank as well as 

any other property in the possession or 

control of, or maintained with, any 

Reserve Bank, to secure discount 

window loans and any other 

obligations, such as daylight overdrafts, 

owing to any Reserve Bank.20

The new strategy would retain a net 

debit cap regime for all depository 

institutions.21 The net debit cap would 

focus on addressing low-probability 

risks and not unduly constraining 

normal demands for balances and 

credit. Industry best practices and 

supervisory guidance support the use of 

borrowing limits, or caps, even for 

collateralized risk exposures as a 

prudent credit risk management tool. 

Caps also serve as a useful mechanism 

for both Reserve Banks and institutions 

in terms of setting benchmarks for the 

maximum expected usage of daylight 

credit and supporting collateral. 

The new strategy also reflects the 

Board’s sensitivity to avoiding sudden 

and disruptive changes in policy that 

would not be in the public interest and 

would not advance efforts to improve 

payments system efficiency and safety. 

Hence, an element of the new strategy 

is to move toward a greater use of 

collateral in a way that minimizes the 

cost and administrative burden of the 

policy on most users of daylight 

overdrafts. As a general matter, the 

Board believes that requiring depository 

institutions to pledge collateral to 

support daylight overdrafts would be 

consistent with reducing Reserve Bank 

credit risk, with existing discount 

window practices, and with the policies 


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22Historically, the Board has sought to minimize 

the cost and administrative burden of the PSR 

policy on institutions that do not rely significantly 

on the use of daylight overdrafts to make payments. 23Access to daylight credit would continue to be 

available only to institutions with regular access to 

the discount window as is the case today. 

24Problem institutions are institutions that are in 

weak financial condition and should refrain from 

incurring daylight overdrafts and institutions that 

chronically incur daylight overdrafts in excess of 

their net debit caps in violation of the PSR policy. 

25The proposed $150 waiver would be subtracted 

from the gross fees (in a two-week reservemaintenance period) assessed on any depository 

institution eligible to incur daylight overdrafts. This 

procedure differs from the current policy in which 

the waiver only eliminates gross fees of institutions 

that have charges less than or equal to $25 in a twoweek period. 

26See http://www.frbdiscountwindow.org/ for 

information on the discount window and PSR 

collateral acceptance policy and collateral margins. 

27 In-transit securities are book-entry securities 

transferred over the Fedwire securities system that 

have been purchased by a depository institution but 

not yet paid for or owned by the institution’s 

customers. 

of other central banks. The Board is 

concerned, however, about the potential 

implications of moving to a mandatory 

collateral regime at this time, because of 

the uncertain effects such a move might 

have on intraday liquidity and 

operational risk, as well as the burden 

on the banking industry.22 The Board 

will continue to monitor developments 

over time and to evaluate the costs and 

benefits of moving further toward a 

collateralized structure. 

IV. Discussion of Proposed PSR Policy 

Changes 

To implement this new strategy, the 

Federal Reserve System will need to 

adjust its current terms and fees for 

providing daylight overdrafts. The 

Board believes that the following points 

summarize in broad terms the elements 

of a new PSR policy that would be 

consistent with such a change in 

strategy: 

• Explicitly encourage the pledging of 

collateral to support intraday credit and 

apply unencumbered discount window 

collateral to intraday credit. 

• Eliminate the fee for collateralized 

intraday credit. 

• Increase the fee for uncollateralized 

intraday credit. 

• Retain a modified version of the 

single-day daylight overdraft cap to 

limit the ultimate size of Reserve Bank 

risk exposures. 

• Adopt measures to limit the impact 

of policy changes on depository 

institutions that are relatively small 

users of intraday credit. 

Table 1 summarizes the specific 

elements of the current and proposed 

PSR policy. 

TABLE 1.—SUMMARY OF KEY ELEMENTS OF THE CURRENT AND PROPOSED PSR POLICY 23

Current policy Proposed policy 

Collateral .............................. Required for problem institutions 24 and institutions with 

max caps. Collateral eligibility and margins same as 

discount window.

Additional provision that explicitly applies collateral 

pledged by healthy institutions to daylight overdrafts 

in their Reserve Bank accounts. 

Fee for collateralized daylight overdrafts.36 basis points ................................................................ Zero fee. 

Fee for uncollateralized daylight overdrafts.36 basis points ................................................................ Increase to 50 basis points. 

Deductible ............................ 10 percent of an institution’s capital measure ................ Replaced by zero fee for collateralized daylight overdrafts and increased fee waiver. 

Fee waiver ........................... Up to $25 biweekly ......................................................... $150 biweekly.25

Net debit cap ........................ Two-week average limit and higher single-day limit ....... Two-week average limit is eliminated; adjusted policy 

for single-day limit. 

Max cap ............................... Additional collateralized capacity above net debit cap 

for self-assessed institutions.

Streamlined process for certain FBOs up to a limit; 

minor changes for all institutions. 

Penalty fee for ineligible institutions.136 bps ........................................................................... Increase to 150 bps. 

To assist institutions in 

understanding the effect of the proposed 

policy on their daylight overdraft fees, 

the Board has developed a simplified 

fee calculator. The calculator enables 

institutions to provide daylight 

overdraft and collateral data to estimate 

their daylight overdraft fees under the 

proposed policy. The calculator is 

located on the Board’s Web site at 

https://www.federalreserve.gov/apps/ 

RPFCalc/. 

A. Collateral. To help meet 

institutions’ demand for intraday 

balances while mitigating Reserve Bank 

credit risk, the Board would adopt a 

policy of supplying intraday balances 

predominately through explicitly 

collateralized daylight overdrafts 

provided by Reserve Banks to healthy 

depository institutions at a zero fee. To 

avoid disrupting the operation of the 

payments system and increasing the 

cost burden on a large number of 

smaller users of daylight overdrafts, the 

Board would allow the use of collateral 

to be voluntary, but a system of twotiered fees would be adopted to 

encourage the industry to make greater 

use of collateral. Unencumbered 

discount window collateral would 

explicitly collateralize daylight 

overdrafts, and collateralized overdrafts 

would be charged a zero fee. Collateral 

eligibility and margins would remain 

the same for PSR policy purposes as for 

the discount window.26 In addition, the 

pledging of in-transit securities would 

remain an eligible collateral option for 

PSR purposes at Reserve Banks’

discretion.27

Of the twenty-three responses to the 

consultation paper, fourteen 

commenters addressed the question 

regarding greater use of collateral to 

cover daylight overdrafts. All fourteen 

commenters supported greater use of 

collateral (particularly to obtain a lower 

daylight overdraft fee). A number of the 

respondents specifically argued for 

voluntary or partial collateralization of 

intraday credit. Several respondents 

also commented that collateralized 

overdrafts should be free of charge or 

subject to an adjusted daylight overdraft 

fee. Most commenters stated that their 

support for greater use of collateral was 

contingent upon being able to use 

unencumbered discount window 

collateral to support intraday credit. 

The Board considered whether it 

should require collateralization of all 

daylight overdrafts at this time. The 

Board generally believes that requiring 

depository institutions to pledge 

collateral to support daylight overdrafts 


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28 In the early 1990s, the Reserve Banks began 

standardizing policies regarding eligible asset types, 

acceptance criteria, and valuation. By the mid 

1990s, the Reserve Banks allowed multiparty 

pledges through DTC. In the late 1990s, the Reserve 

Banks began using market pricing for securities 

valuation, started allowing for nonbank custodian 

and foreign custodian (Clearstream and Euroclear) 

arrangements, and began accepting a broader array 

of asset types of collateral. New types of eligible 

assets since that time have included non-AAA ABS, 

AAA collateralized debt obligations, commercial 

mortgage-backed securities, trust preferred 

securities, credit union mutual funds, GSE stock, 

STRIPS, German jumbo Pfandbriefe, and certain 

other foreign currency-denominated assets. 

29This collateral value reflects lendable value 

based on the Reserve Banks’ margins and does not 

include pledges of in-transit securities. 

would be consistent with reducing 

Reserve Bank credit risk, existing 

discount window practices, and the 

policies of other central banks. 

However, the potential effect on 

intraday liquidity and operational risk, 

along with the burden on the banking 

industry of a move to mandatory 

collateral, suggests caution. For 

example, requiring collateral could 

result in institutions being subject to 

rejected payments or high ‘‘penalty’’

fees if they exceed the amount of 

pledged collateral, could increase 

payment queuing by institutions 

without sufficient collateral to pledge, 

and could add significant compliance 

costs to the banking industry. Indeed, 

one respondent specifically stated in its 

comment letter that it was not 

supportive of moving to a mandatory 

collateral regime for daylight overdrafts 

even at a zero fee. For all these reasons, 

at this time, the Board is proposing a 

voluntary collateral regime for daylight 

overdrafts. 

The Board has long recognized that 

accepting collateral from institutions 

would help control intraday credit risk 

to Reserve Banks. Moving towards 

greater collateralization of daylight 

overdrafts was hampered in the past by 

concerns about administration costs to 

depository institutions, incentive 

effects, and other unintended 

consequences. Most of these concerns 

have been addressed over time. 

In the early 1980s, the aggregate 

amount of collateral pledged to the 

discount window was quite low relative 

to intraday credit extended, and many 

depository institutions had not signed 

the necessary legal agreements with 

their Reserve Banks. During early PSR 

policy consultations, there was also 

concern about the administrative costs 

of pledging and monitoring additional 

collateral and about the possibility that 

Fedwire or other payments could be 

disrupted if a depository institution did 

not have sufficient collateral at a 

particular point during the day. Since 

the 1980s, however, the quantity of 

collateral pledged to the discount 

window has increased dramatically. In 

particular, pledges to the discount 

window began to increase as a result of 

industry and Federal Reserve actions to 

address contingencies prior to the 

century date change and following 

September 11th.28 As of year-end 2007, 

more than $980 billion in assets were 

pledged for discount window and PSR 

purposes, most of which was 

unencumbered by outstanding discount 

window loans.29

Most of the largest users of daylight 

overdrafts have sufficient 

unencumbered collateral pledged to the 

Reserve Banks to cover their average 

level of daylight overdrafts. In addition, 

as table 1 indicates, during the fourth 

quarter of 2007, fifteen of the twenty 

largest users of intraday credit would 

have been able to cover the average peak 

amount of daylight overdrafts using 

existing pledged collateral. In particular, 

the maximum peak overdrafts of eight of 

these institutions would have been 

covered by their current collateral 

pledges. It is highly likely that 

additional collateral would be pledged 

to cover intraday credit if appropriate 

incentives existed. 

TABLE 2.—THE NUMBER OF TOP DAYLIGHT OVERDRAFTERS ABLE TO COLLATERALIZE BORROWINGS WITH EXISTING

COLLATERAL PLEDGES

[Q4 2007] 

Cumulative 

percent of average daylight 

overdrafts 

Number of institutions that have existing collateral to cover: 

Average daylight overdrafts * Average peak 

of daylight 

overdrafts * 

Maximum daily 

peak of daylight overdrafts 

Top 10 .............................................................................................................. 75 8 7 3 

Top 20 .............................................................................................................. 84 18 15 8 

Top 50 .............................................................................................................. 94 46 40 28

Top 100 ............................................................................................................ 97 91 68 47 

Top 200 ............................................................................................................ 98 174 119 80 

* The data are quarterly averages of daily data. 

One issue that has not changed since 

the 1980s is that a substantial number 

of depository institutions, mainly 

smaller institutions, use intraday credit 

but have not signed borrowing 

agreements with their Reserve Banks 

(about 1,500 of 4,400 institutions that 

make some use of intraday credit). In 

addition, another 1,700 institutions that 

use intraday credit have borrowing 

agreements, but have not pledged any 

collateral to the Reserve Banks. Thus, 

the Board recognizes that the policy 

needs to avoid imposing an undue 

burden on small users of daylight credit 

or on the Reserve Banks. The new fee 

waiver is intended to minimize the 

burden on small users of the proposed 

policy changes. 

Another historical administrative 

concern has been the cost and 

practicality of Reserve Banks’ perfecting 

their security interests in collateral and 

monitoring that collateral to manage 

their credit risk. Today, it is a routine 

matter for a Reserve Bank to file a 

Uniform Commercial Code financing 

statement with state authorities to 

perfect its security interest in any and 

all bank assets that are pledged. The 

Reserve Banks have implemented 

automated systems to track collateral 

held at the Reserve Banks, by thirdparty custodians, and by the borrowers 

themselves. In addition, the Reserve 

Banks monitor borrower eligibility to 

participate in a borrower-in-custody 

program. On balance, although 

improvements can always be made in 

procedures and systems, significant 

improvements have been made over 

time that address the earlier 

administrative concerns about explicitly 

collateralizing the daylight overdrafts of 


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30See the Payment System Risk Policy at 

http://www.federalreserve.gov/paymentsystems/psr/ 

policy07.pdf, p. 22. 31The CAMELS ratings apply to commercial 

banks, savings and loan associations, natural person 

credit unions, and bankers’ banks. Other 

supervisory rating structures apply for FBOs and 

corporate credit unions. The Reserve Banks use 

these supervisory ratings and other factors to 

determine credit risk and whether they will extend 

daylight overdraft capacity. 

32See the Policy on Payment System Risk at 

http://www.federalreserve.gov/paymentsystems/psr/ 

policy07.pdf, p.23. 

33The Reserve Banks use real-time monitoring to 

prevent selected institutions from effecting certain 

transactions—outgoing Fedwire funds transfers, 

National Settlement Services transactions, or 

automated clearing house (ACH) credit 

originations—if their accounts lack sufficient funds 

to cover the payments. Generally, a Reserve Bank 

will apply real-time monitoring to an institution’s 

position when the Reserve Bank believes that it 

faces a greater level of risk exposure, for example 

from problem institutions or institutions with 

chronic overdrafts in excess of what the Reserve 

Bank determines is prudent. 

34 66 FR 30208, June 5, 2001. 

35 67 FR 54424, August 22, 2002. 

depository institutions that routinely 

use large amounts of intraday credit. 

In the past, the Board also had 

concerns that accepting collateral to 

address Reserve Bank credit risk for 

daylight overdrafts would not provide 

strong incentives to reduce the level of 

intraday credit. In particular, there was 

concern that because of the wide range 

of collateral accepted by the Reserve 

Banks, depository institutions would 

have weak incentives to reduce their use 

of intraday credit. Under the new 

strategy, the purpose of Reserve Banks 

accepting collateral is not to control the 

level of overdrafts per se, but to mitigate 

credit risk to the Reserve Banks when 

they provide intraday balances and 

credit needed for the smooth operation 

of the payments system. 

Additionally, there was concern that 

reliance on collateral alone might result 

in Reserve Banks providing excessive 

amounts of credit to particular 

depository institutions and present the 

Reserve Banks with reputational and 

residual credit risks. Although the 

Board proposes to relax some aspects of 

the net debit cap program, caps on total 

intraday credit extensions would remain 

in place to help address these risks. 

Eliminating the two-week average net 

debit cap and retaining the higher 

single-day cap for healthy depository 

institutions has the effect of raising caps 

approximately 50 percent from the 

current policy. This increase coupled 

with the incentive to collateralize 

daylight overdrafts is consistent with 

the strategy of providing additional 

balances and credit for the payments 

system. Other central banks that provide 

collateralized intraday credit at a zero 

price have not reported problems with 

excessive growth in the level of intraday 

credit. 

The Board’s main concern about 

unintended consequences has been that 

by taking collateral, the Reserve Banks 

could be inadvertently shifting credit 

risk to unsecured and uninsured 

creditors of an institution or to the 

Federal Deposit Insurance Corporation’s 

(FDIC) deposit insurance fund. With 

regard to unsecured creditors of a 

depository institution, the concern is 

whether these creditors would know 

about the institution’s pledge to a 

Reserve Bank and have an opportunity 

to reduce their exposure to the 

depository institution, increase 

compensation for increased risk, or take 

other appropriate action. The public 

filing of financing statements by Reserve 

Banks and the existence of automated 

services for searching for liens mitigates 

this concern. 

The Board’s concerns about the 

implications for the FDIC’s insurance 

fund predate changes in Reserve Bank 

collateral administration practices and 

the FDIC’s adoption of ‘‘least cost’’

resolution policies pursuant to the FDIC 

Improvement Act of 1991. The Board 

believes that the evolution of the PSR 

policy and related procedures have 

helped to address its concerns. Under 

the current PSR policy, an ‘‘institution 

must be financially healthy and have 

regular access to the discount window’’

in order to qualify to receive daylight 

credit from its Reserve Bank.30 Under 

the implementation scheme for net debit 

caps, a financially healthy institution is 

essentially defined as at least an 

adequately capitalized depository 

institution that has a supervisory rating 

of CAMELS–3 or higher.31 Moreover, a 

Reserve Bank may ‘‘limit or prohibit an 

institution’s use of Federal Reserve 

intraday credit if * * * the institution’s 

use of daylight credit is deemed by the 

institution’s supervisor to be unsafe or 

unsound.’’ 32 Thus, if supervisory issues 

arise with an institution, supervisors, 

including the OCC and FDIC, would be 

and have been consulted about the 

financial condition of an institution that 

is using or seeking to use intraday 

credit. In some circumstances, Reserve 

Banks impose real-time controls to 

reject outgoing Fedwire funds transfers 

that would cause a depository 

institution’s account to exceed a limit, 

including a limit of zero.33 While 

residual risks may exist, PSR policies 

and procedures as well as FDIC 

legislation have been significantly 

enhanced in ways that help control both 

risk to the Reserve Banks and to the 

FDIC insurance fund. 

On balance, the Board believes that 

explicitly accepting collateral for 

daylight overdrafts on a voluntary basis 

offers important improvements in 

policy. In particular, collateralized 

daylight overdrafts will support 

liquidity and operational risk reduction 

for the payments system, long-term 

credit risk reduction for the Reserve 

Banks, and a more-reasonable cost 

burden on the industry. 

B. Fees for collateralized daylight 

overdrafts. The Board proposes lowering 

the fee to zero for collateralized daylight 

overdrafts to encourage institutions to 

pledge collateral and to reduce 

payments held in liquidity-management 

queues. The value of unencumbered 

collateral pledged at the Reserve Banks 

for PSR or discount window purposes 

would be applied in the determination 

of daylight overdraft fees assessed to 

institutions. 

Of the twelve commenters that 

addressed two-tier pricing with a lower 

fee for collateralized overdrafts, most 

were highly supportive, particularly if 

the fee on collateralized daylight credit 

were zero. The other commenters raised 

questions or issues for the Board’s 

consideration. For instance, one 

commenter that supported two-tier 

pricing expressed some concern about 

the potential cost and complexity of 

implementing a two-tier pricing system. 

Another mentioned the likelihood that 

two-tier pricing would increase the level 

of daylight overdrafts. In addition, 

several institutions specifically 

requested that all unencumbered 

collateral pledged to the Reserve Bank 

for discount window or PSR purposes 

be considered in calculating an 

institution’s fees. 

The Board has previously raised the 

possibility of a two-tier pricing system 

for collateralized and uncollateralized 

daylight overdrafts. In 2001, the Board 

requested comment on two-tier pricing 

as a long-term PSR policy direction. 34

Then, as now, most commenters were 

supportive of such a regime. In August 

2002, the Board stated that it would 

continue to study two-tier pricing for 

collateralized and uncollateralized 

overdrafts.35 The Board also specified 

that the Reserve Banks would charge the 

collateralized rate on daylight overdrafts 

up to the value of collateral pledged and 

then apply the uncollateralized rate to 

the remaining daylight overdrafts. 

To determine a collateralized fee, the 

Board has reviewed historical papers 

and discussions of overdraft pricing, 

industry comments and discussions 

surrounding the consultation paper, and 

the practices of other major central 

banks. There is no definitive economic 

literature on whether there is a nonzero 

intraday rate of interest that should be 


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36These deliveries take place over the Fedwire 

securities (delivery-versus-payment) system, with 

the account of the depository institution delivering 

securities credited with the accompanying funds 

and the depository institution receiving the security 

debited for those funds. The depository institutions 

and their large customers delivering securities 

control the delivery process. Fees provide a 

significant incentive for institutions to return 

(deliver) securities early in the day and obtain the 

corresponding funds credits in order to limit 

daylight overdrafts at a Reserve Bank. These early 

deliveries have the corresponding effect of 

generating priced daylight overdrafts in the 

accounts of institutions receiving securities, which, 

in turn, provides incentives to settle new trades or 

initiate new deliveries quickly. 

37Work with the industry on models for a 

liquidity-saving mechanism for the Fedwire funds 

transfer system began in August 2007. 

38The spread between the overnight Federal 

funds rate and the Treasury general collateral repo 

rate can be used as a proxy or measure of credit 

risk. The spread can be volatile over short periods, 

reflecting changes in the availability of Treasury 

collateral. The average spread since 1991 is 7 basis 

points, with a standard deviation of 17 basis points. 

From 2000 to 2007, the average spread was between 

6 and 10 basis points, while from mid-1980 to 2000, 

the spread was closer to 12 to 15 basis points. 

39See 66 FR 30208, June, 5, 2001. 

used in calculating fees for 

collateralized intraday central bank 

credit. There are different views. One 

view argues that it would be anomalous 

if the general term structure of interest 

rates contained a major discontinuity 

between the overnight rate and the 

intraday rate but without showing how 

to determine the existence and level of 

an intraday rate. Another view 

essentially holds that intraday balances 

provided by central banks should be 

priced at the marginal social cost of 

production, which is approximately 

zero for central banks. This view is 

reinforced by recent academic work 

suggesting that the role of central bank 

intraday balances and credit is to help 

coordinate the settlement of payments 

and not ultimately to finance underlying 

real economic activity. 

From the economic literature, a 

reasonable perspective is that central 

banks should target a rate for providing 

collateralized daylight balances and 

credit that advances the policy 

objectives of the central bank. Further, 

because there is no evidence from other 

countries that intraday rates affect 

central bank macroeconomic goals, such 

as inflation or unemployment, a central 

bank has the flexibility to set an 

intraday rate to advance its payments 

system objectives of safety and 

efficiency. This is the intraday credit 

pricing strategy generally followed by 

other major central banks, and there 

have not been any reported effects on 

the central banks’ ability to achieve 

their monetary policy objectives. 

The Board’s view is that setting the 

collateralized daylight overdraft fee at 

zero would improve tradeoffs among 

liquidity, operational, and credit risks in 

the payments system. Although the 

amount of intraday credit provided 

could well increase, credit risk to the 

Reserve Banks would be controlled by 

traditional banking tools used in 

providing credit (eligibility 

requirements, collateral, caps, and 

monitoring). The Board also believes 

that credit risk to depository institutions 

could decrease somewhat because 

greater liquidity would imply faster 

payments and settlements and a 

correspondingly shorter duration of 

intraday risk on customer accounts and 

counterparty settlements. Similarly, 

liquidity would likely circulate more 

quickly with the faster flow of payments 

as the incentive for depository 

institutions to queue payments for 

liquidity purposes declines. Operational 

risk from late-day payments would also 

likely decline somewhat if depository 

institutions release payments generated 

earlier in the day from their internal 

afternoon liquidity queues. 

In addition, some theoretical 

literature and discussions with bankers 

suggest that setting the collateralized fee 

at even a low rate above zero might 

continue to provide incentives to queue 

and delay payments. For example, small 

incentives can lead to strategic behavior 

by depository institutions in which each 

waits for the other to send payments 

that essentially provide the liquidity to 

avoid (priced) daylight overdrafts, 

which in turn leads to a generalized 

delay of payments until late in the day. 

Discussions with depository institutions 

tend to confirm that, if a payment is not 

time-sensitive, they may very well hold 

that payment to reduce overdraft 

charges that affect their budgets. Thus, 

the Board believes that the industry may 

continue to hold back payments at any 

positive fee for collateralized intraday 

credit. 

The Board recognizes that a zero fee 

for collateralized intraday credit is 

unlikely to reduce the share of late-day 

payments back to pre-2000 levels. As 

validated by the PRC and WCAG survey, 

a number of late-day payments are not 

originated until late in the day, and 

many of these are unlikely to be affected 

by changes to daylight overdraft fees. 

For example, late-day money market 

investments will of necessity generate 

late-day payments. 

In weighing the reasons for charging 

a zero fee for collateralized daylight 

overdrafts, the Board identified at least 

two potential unintended consequences. 

First, the Board is concerned that a zero 

fee for collateralized overdrafts could 

eliminate incentives for depository 

institutions and their customers to 

return securities used in repurchase 

agreements early in the morning. The 

practice of early return grew out of a 

coordinated effort by the clearing banks 

and the market to respond to the 

implementation of overdraft fees in 

1994 by delivering government and 

agency securities held under certain 

types of repurchase agreements back to 

borrowers of funds and their banks early 

in the morning.36 The concern is that 

removing the overdraft fee could remove 

the incentive for the early returns of 

securities, which has been viewed as an 

important operational success in the 

securities industry. Initial discussions 

with some depository institutions 

suggest that the early return of securities 

has become an entrenched practice in 

the market and it would not be reversed 

if there were a zero fee for collateralized 

daylight overdrafts. 

Second, the Board is concerned that a 

collateralized overdraft fee of zero 

would reduce the incentives of 

depository institutions to invest in a 

new liquidity-saving mechanism for the 

Fedwire funds transfer system or to 

improve practices in using CHIPS or 

DTC.37 This is a clear risk to the overall 

four-prong strategy for addressing 

liquidity, operational, and credit risk. 

Other countries, such as Germany, have 

seen a demand for liquidity-saving 

mechanisms even with zero overdraft 

fees, but those demands may have been 

motivated by depository institutions’

desire to save collateral capacity in a 

regime of mandatory collateralization of 

intraday credit. 

While the Board is concerned about 

these possible unintended 

consequences, it must balance these 

concerns with its goal of reducing 

liquidity, operational, and credit risks. 

On balance, the Board believes that 

charging a zero fee for collateralized 

overdrafts will contribute to overall risk 

reduction. 

C. Fees for uncollateralized daylight 

overdrafts. In a regime in which the 

Board expects the pledging of collateral 

to become the norm, but remain 

voluntary to avoid the disruptions of 

rejecting payments that could occur 

under mandatory collateralization, the 

fee for uncollateralized overdrafts takes 

on a new role of providing a significant 

incentive to collateralize overdrafts. In 

the past, the Board has suggested 

assessing a ‘‘risk premium’’ for 

uncollateralized overdrafts by 

estimating the spread between the 

overnight Federal funds rate and the 

Treasury general collateral repo rate.38

In 2001, the Board cited a risk premium 

of 12 to 15 basis points.39 Although the 


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40Another possible proxy of credit risk is the rate 

associated with credit default swaps for major 

depository institutions. Between January 2001 and 

December 2007, the median spread for an index of 

one-year credit default swaps on major depository 

institutions was 10 basis points (standard deviation 

of 10 basis points). The minimum and maximum for 

the index were 1 and 63 basis points, respectively. 

41 In calculating an institution’s fees, the value of 

collateral pledged to the Reserve Banks will be 

subtracted from negative account balances at the 

end of each minute. All minutes where the negative 

account balance exceeds the value of collateral 

pledged will be summed and divided by the 

number of minutes in the Fedwire operating day to 

arrive at a daily uncollateralized daylight overdraft, 

which would be assessed the 50 basis point 

(annual) fee. The value of collateral pledged is the 

same for PSR and discount window purposes. 

42As a result of the sizeable reductions in 

daylight overdrafts achieved by the introduction of 

fees, as well as concerns about the possible effects 

of further rapid fee increases, the Board announced 

in March 1995 that it would increase the fee to 36 

basis points rather than the planned 48 basis points. 

Originally, the Board planned to phase in over three 

years a fee of 60 basis points in steps of 24, 48, and 

60 basis points. 

43 Daylight overdraft charges are reduced by a 

deductible, which is calculated using 10 percent of 

eligible capital. The deductible was created with 

the introduction of pricing to provide some amount 

of free liquidity to the payments system, to 

compensate depository institutions for periodic 

outages of Reserve Bank computer systems, and to 

enhance operational simplicity by exempting small 

users of intraday credit. The Reserve Banks also 

waive fees of up to $25 or less in any two-week 

reserve-maintenance period. The waiver reduces 

administrative burden on Reserve Banks and a large 

number of depository institutions that incur small 

fees. 

44The proposed waiver would not result in 

refunds or credits to an institution. The waiver 

would not apply to institutions subject to the 

penalty fee. 

45See 51 FR 45054, December 16, 1986, and 52 

FR 29255, August 6, 1987. 

current fee of 36 basis points is higher 

than this risk premium if a zero fee is 

charged for collateralized daylight 

overdrafts, the fee arguably reflects 

allowances for variation in the risk 

premium across time and across 

borrowers.40 Under the proposed 

strategy to encourage the voluntary 

pledging of collateral, the Board 

proposes a more-significant spread 

between collateralized and 

uncollateralized daylight overdrafts that 

exceeds previous estimates of the risk 

premium. Specifically, the Board 

proposes raising the fee to 50 from 36 

basis points (annual rate) for 

uncollateralized daylight overdrafts to 

encourage the collateralization of 

daylight overdrafts.41 The Board notes 

that the proposed 50 basis point fee for 

uncollateralized credit would be less 

than the final fee of 60 basis points for 

daylight credit originally announced by 

the Board in 1994 but never 

implemented.42

The 50 basis point fee for 

uncollateralized overdrafts would 

provide a strong incentive for a 

depository institution to pledge 

collateral to its Reserve Bank in an 

amount sufficient to reduce or eliminate 

the depository institution’s charges for 

its use of daylight credit. In addition, 

the fee for uncollateralized credit would 

discourage the use of uncollateralized 

daylight credit by those depository 

institutions that have not pledged 

sufficient collateral to support their 

payments activity. If uncollateralized 

credit increases, however, the fee for 

uncollateralized credit could be raised 

at a future date to limit further the use 

of such credit. At this time, the 50 basis 

point spread between collateralized and 

uncollateralized daylight overdrafts 

sufficiently underscores the Board’s 

new strategy about the importance of 

pledging collateral to obtain intraday 

balances and to reduce the Reserve 

Banks’ credit risk. 

D. Deductible. The Board has long 

sought to minimize the burden of the 

PSR policy on institutions that use 

small amounts of daylight overdrafts by 

adopting a series of special provisions 

in the administration of daylight 

overdraft pricing and net debit caps. 

These provisions reflect the highly 

concentrated incidence of overdrafts at 

twenty depository institutions, which 

incur about 80 percent of daylight 

overdrafts. Two important components 

of the current PSR policy are the 

deductible from daylight overdraft fees 

based on an institution’s capital and a 

$25 biweekly fee waiver.43 In essence, 

an amount of free uncollateralized 

intraday credit is provided through 

these provisions. The Board proposes to 

eliminate the deductible but also 

proposes to increase the fee waiver 

(discussed in the next section) to 

minimize the burden of the policy 

changes on small users of daylight 

overdrafts. 

Continuing to provide significant 

amounts of free uncollateralized credit 

to large institutions through the 

deductible would be inconsistent with 

the strategy of emphasizing the 

provision of intraday credit through 

collateralized overdrafts at a zero fee. 

Retaining the deductible would weaken 

the incentives for depository 

institutions to pledge collateral to cover 

overdrafts and would not decrease risk 

to the Reserve Banks. In particular, the 

largest users of daylight credit would be 

able to use collateral to cover a 

significant portion of their overdrafts 

and then use their deductible to avoid 

fees on a significant amount of 

uncollateralized credit, undermining the 

incentive effects of fees on 

uncollateralized daylight overdrafts. 

Further, to the extent the deductible 

historically provided a source of free 

liquidity to depository institutions, it 

would no longer be needed because 

collateralized credit would provide an 

alternative source of free intraday 

liquidity. In addition, eliminating the 

deductible and increasing the fee waiver 

would provide a simpler and moreuniform way to provide a de minimis 

amount of free uncollateralized credit 

and would help limit the cost burden of 

the policy on small users of daylight 

overdrafts. 

Further, the Board believes that by 

eliminating the deductible for all 

depository institutions and providing 

free collateralized intraday credit to 

eligible depository institutions, 

including FBOs, the proposed policy 

changes would address the negative 

incentive effects of the deductible 

calculations on FBOs that the 

commenters identified. FBOs would be 

assessed the same fees as U.S.-chartered 

depository institutions, which, under 

the proposal, would be zero for 

collateralized daylight overdrafts and 50 

basis points for uncollateralized 

overdrafts. 

E. Fee waiver and treatment of small 

users of daylight overdrafts. The Board 

continues to believe that it is important 

to reduce the burden of the PSR policy 

on institutions that use small amounts 

of daylight overdrafts. In setting the fee 

waiver amount, the Board sought to 

balance the risk faced by Reserve Banks 

from uncollateralized overdraft 

exposures against the administration 

costs to Reserve Banks and depository 

institutions from fee assessments and 

collateral arrangements. The Board 

proposes to limit the burden for 

institutions that use small amounts of 

daylight overdrafts by increasing the fee 

waiver to $150 from $25. The waiver 

would be subtracted from the gross fees 

(in a two-week reserve-maintenance 

period) assessed on any user of daylight 

overdrafts.44 This procedure differs 

from the current policy in which the 

waiver only eliminates gross fees of 

institutions that have charges less than 

or equal to $25 in a two-week period. 

This approach would avoid a 

discontinuity in applying the waiver, 

which may create incentives for 

delaying payments to prevent a large 

marginal increase in fees. 

An institution is defined as a small 

user of daylight credit if the institution 

has an exempt cap, which is the 

smallest positive cap under the policy, 

or if the institution averages less than $1 

million a day in daylight overdrafts. The 

Board has historically considered 

exempt-cap institutions to be small 

users of daylight overdrafts.45 In 


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46See 51 FR 45054, December 16, 1986. 47The fee data for mid-to-large users and all users 

exclude one institution that is an outlier in 

comparison to the other institutions that could be 

paying higher fees. The annual average increase in 

fees more than doubles for mid-to-large institutions 

and all users with the inclusion of this institution. 

This institution would incur a fee increase of 

almost $3 million per year. The next highest 

increases in fees are $475,000 and $260,000 per 

year. 

addition, a number of institutions with 

higher cap levels regularly incur similar 

small amounts of daylight overdrafts. 

The level of $1 million, in 2007 dollars, 

is based on levels historically 

considered small.46 Through the waiver, 

the Board intends to limit the burden for 

virtually all exempt-cap institutions and 

to cover the routine overdraft activity of 

institutions that average less than $1 

million a day in daylight overdrafts. 

The Board considered a range of 

waiver amounts from $100 to $250. At 

the $150 waiver, the amount of free 

credit provided limits the burden for 

virtually all exempt-cap institutions and 

covers the routine overdraft activity of 

small users. Beyond a $150 waiver, the 

number of small users that would be 

paying higher fees diminishes only 

marginally, and mid-to-large users of 

daylight overdrafts benefit increasingly. 

On balance, the Board determined that 

the associated increase in 

uncollateralized Reserve Bank exposure 

per day of increasing the waiver amount 

outweighed the marginal decrease in the 

number of small users paying higher 

fees. In addition, a higher waiver 

amount would decrease the incentive to 

pledge collateral for those mid-to-large 

users of daylight overdrafts benefiting 

from the waiver increase. 

Based on fourth-quarter 2007 daylight 

overdraft and collateral values, table 3 

shows that the proposed $150 waiver 

would eliminate or reduce fees for 99.2 

percent of small users of daylight 

overdrafts. The vast majority of these 

institutions do not pay fees under the 

current policy. The waiver, however, 

would not eliminate or reduce fees paid 

for all small users because some of these 

institutions incur relatively high 

daylight overdrafts on peak days, which 

could result in fees. In particular, the 

$150 waiver generally covers routine 

daylight overdraft activity for small 

users but may not cover the highest one 

or two business days in the quarter. 

Because of this peak overdraft activity, 

an estimated thirty-five small users 

could pay higher fees based on fourthquarter data if they did not pledge 

(additional) collateral. The actual 

number of depository institutions that 

could incur higher fees will vary over 

time based on daylight overdrafts 

incurred and collateral pledged. In 

practice, there are few institutions, 

especially small users, that would pay 

fees across all two-week periods in 

which fees are assessed in a given year. 

The average annual increase in fees 

for each of the thirty-five institutions is 

approximately $180. Of the thirty-five 

institutions, a small number could incur 

an increase in average fees between 

$500 and $1,000 in a year, while the 

other institutions could incur increases 

of less than $500 in a year (or less than 

$20 in a two-week period). The higher 

fees are associated with peak levels of 

daylight overdraft activity relative to the 

amounts of collateral pledged. Each 

small user could eliminate increases in 

fees by pledging $8 million, on average, 

in (additional) collateral. As of the 

fourth-quarter 2007, only about 14 

percent of these small users had 

collateral pledged, although two-thirds 

had signed borrowing documents with 

their administrative Reserve Banks. 

Table 3 also shows that over half (52 

percent) of institutions that incur midto-high levels of daylight overdrafts 

(mid-to-large users) would have 


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12428 Federal Register / Vol. 73, No. 46 / Friday, March 7, 2008 / Notices 

48The ex post counseling regime includes a series 

of actions by the Reserve Bank that are aimed at 

deterring an institution from violating the PSR 

policy by exceeding its net debit cap. These actions 

depend on the institution’s history of daylight 

overdrafts and financial condition. Initial actions 

taken by the Reserve Bank may include an 

assessment of the causes of the overdrafts, a 

counseling letter to the institution, and a review of 

the institution’s account-management practices. If 

policy violations continue to occur, the Reserve 

Bank may take additional actions, which may 

include encouraging the institution to file a cap 

resolution or perform a self-assessment to obtain a 

higher net debit cap or to apply for maximum 

daylight overdraft capacity. In situations in which 

an institution continues to violate the PSR policy, 

and counseling and other Reserve Bank actions 

have been ineffective, the Reserve Bank may assign 

the institution a zero cap. The Reserve Bank may 

also impose other account controls that it deems 

prudent, such as requiring the institution to pledge 

collateral, imposing clearing balance requirements; 

rejecting Fedwire funds transfers, ACH credit 

originations, or National Settlement Service 

transactions that would cause or increase an 

institution’s daylight overdraft; or requiring the 

institution to prefund certain transactions. 

49FBOs will continue to be monitored at their cap 

level in real time. If an institution’s account is 

monitored in real time, any outgoing Fedwire funds 

transfer, National Settlement Service transaction, or 

ACH credit origination that exceeds available funds 

is rejected. 

sufficient collateral to eliminate or 

reduce their fees paid, while slightly 

less than half (48 percent) of mid-tolarge users could face higher fees or 

would need to pledge collateral. Much 

of their overdraft activity was excluded 

from fees under the deductible of the 

current policy. 

The average annual increase in fees 

across the 125 mid-to-large users paying 

higher fees is approximately $18,350 (or 

$690 per two-week period). The large 

majority of these institutions (about 75 

percent) would incur an increase in 

average fees of less than $10,000 per 

year (less than $375 in a two-week 

period). Many of the mid-to-large users 

have pledged collateral and have signed 

borrowing documents. Pledging 

(additional) collateral of $90 million on 

average per institution would avoid any 

increase in fees. 

The Board recognizes that institutions 

will be interested in the effect of the 

proposed changes on their daylight 

overdraft fees. To assist institutions, the 

Board has developed a simple fee 

calculator. The calculator enables 

institutions to provide daylight 

overdraft and collateral data to estimate 

their daylight overdraft fees under the 

proposed policy. The calculator is 

located on the Board’s Web site at 

https://www.federalreserve.gov/apps/ 

RPFCalc/. 

F. Net debit caps. Based, in part, on 

the expectation of some additional 

collateralization of daylight overdrafts 

and the potential need to provide more 

credit to the industry, the Board 

proposes to eliminate the current twoweek average cap on daylight overdrafts 

for healthy depository institutions and 

retain the higher single-day cap. The 

effect is to increase the routine daylight 

overdraft capacity of healthy 

institutions with self-assessed caps 

approximately 50 percent from the 

current policy. The single-day cap will 

apply to the total of collateralized and 

uncollateralized daylight overdrafts. 

The Board also proposes to provide 

additional flexibility in the 

administration of net debit caps for fully 

collateralized daylight overdrafts. If an 

institution incurs an overdraft above its 

single-day cap, the Board proposes the 

following new ex post monitoring and 

counseling procedures. 

(1) If any part of the overdraft is 

uncollateralized, the current ex post 

counseling regime would be used.48

Counseling may include a discussion of 

ways the institution could manage more 

effectively its account as well as other 

possible Reserve Bank actions, such as 

reducing the net debit cap and rejecting 

certain payment transactions, that 

would enable the Reserve Bank to 

protect its risk exposure from the 

institution. 

(2) If the overdraft is fully 

collateralized, the Reserve Bank would 

generally consider the condition an 

‘‘overlimit’’ situation and would be able 

to ‘‘waive counseling’’ for two incidents 

of overlimit, fully collateralized 

overdrafts per two consecutive reservemaintenance periods (four weeks). 

Incidents of overlimit, fully 

collateralized overdrafts beyond the two 

waivable incidents would be subject to 

ex post counseling. 

The overlimit flexibility would apply 

to institutions that have de minimis or 

self-assessed net debit caps or max 

caps.49 Exempt-cap institutions are 

already allowed under the policy to 

incur up to two cap breaches in two 

consecutive reserve-maintenance 

periods. Zero cap institutions would not 

be eligible. The overlimit flexibility 

would also be in addition to other 

permissible waivers, such as waivers 

due to Reserve Banks’ errors. 

The overlimit flexibility allows a 

depository institution to obtain 

additional fully collateralized credit 

beyond the established single-day cap 

on an infrequent basis if the depository 

institution has fully collateralized all of 

its daylight overdrafts-both those above 

and those below its cap—when the 

event occurs. The proposed waiver of 

counseling for overlimit overdrafts, if 

they are fully collateralized, reflects 

their lower risk to a Reserve Bank 

relative to an overlimit condition for 

uncollateralized credit. The Board 

recognizes that the Reserve Banks may 

need to be flexible in granting fully 

collateralized credit to carry out the 

intent of the new policy. The additional 

flexibility also reinforces the new 

explicit policy emphasis on 

collateralized intraday credit. The 

limited number of waivers, however, 

reflects the fact that collateral may not 

fully protect a Reserve Bank and that 

frequent breaches of agreed caps may 

reflect other concerns about a 

depository institution, including an 

inability to manage its account at a 

Reserve Bank or to manage its 

customers’ activity. In addition, max 

caps would continue to be available at 

a Reserve Bank’s discretion to deal with 

cases in which routine additional 

capacity is needed by healthy 

institutions. 

The overlimit flexibility also 

recognizes that from a supervisory 

perspective counterparty credit risk 

management systems allow for bank 

management to approve exceptions to 

those limits under appropriate 

conditions, assuming the proper degree 

of management attention is focused on 

such decisions. A waiver of what is 

currently called a ‘‘breach’’ of a daylight 

overdraft cap can be likened to an 

‘‘approval’’ of an overlimit condition 

vis-a`-vis a counterparty credit risk 

exposure limit. 

The Board examined the need to 

retain the net debit cap structure for 

institutions that fully collateralize 

overdrafts and concluded that it is still 

appropriate and prudent to have limits 

on intraday credit even when the credit 

is fully collateralized. First, prudent 

banking practice and current 

supervisory guidance support placing 

limits on counterparty credit exposures 

even when other tools such as collateral 

(with haircuts) are used to control risk. 

The basis for this guidance is that 

collateral alone should not be regarded 

as sufficient protection against 

counterparty credit risk but that a range 

of tools should be used to manage risk, 

including credit limits. Haircuts on 

collateral help mitigate the risk that 

counterparty credit exposure that is 

intended to be collateralized will 

remain collateralized when the value of 

the collateral declines. Haircuts 

themselves, however, may change more 

slowly than the value of collateral for a 

variety of operational, market, and 

policy reasons. Limits or caps 

complement the use of collateral in risk 

mitigation. Among other things, they 

aim to constrain the size of exposures in 

the first place rather than to mitigate the 

risk of loss on exposures of a given size. 

Moreover, limits may be used to limit 


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50See Association of Reserve City Bankers, The 

Final Report of the Risk Control Task Force, 

prepared with the assistance of the Bank 

Administration Institute and Robert Morris 

Associates (October 1984). 

51Limits on daylight overdrafts also address the 

possibility of ‘‘adverse selection’’ in a system of 

voluntary collateralization. In essence, depository 

institutions in weaker operational or financial 

condition might be quicker to pledge collateral to 

obtain larger amounts of intraday credit than 

stronger banks, for example, to ensure that critical 

payments are made on time. In the theoretical 

literature, caps or limits are frequently 

characterized as helping to deal with adverse 

selection issues in credit markets. Although Reserve 

Banks typically have access to supervisory 

information about their borrowers, including their 

history and management, the Reserve Banks may 

have imperfect information, which may be another 

argument for caps as a useful tool in limiting 

residual risk from such problems. 

52Current procedures associated with max caps 

can be found in the Guide to the Federal Reserve’s 

Payments System Risk, which is available at http:// 

www.federalreserve.gov/paymentsystems/psr/ 

mainguide.pdf. 

53The FBO would still be required to complete 

a self-assessment and provide a board of directors 

resolution for the self-assessed cap. 

exposure to extreme risks and take some 

pressure off the use of haircuts to 

address such risks. 

Second, daylight overdrafts operate 

more like drawings on lines of credit 

than discrete loans. Limits help the 

Reserve Banks set expectations about 

the quantity of their potential exposures 

and help depository institutions to keep 

their use of credit within prudent and 

agreed-upon bounds. Further, credit 

limits serve as standardized benchmarks 

for analyzing and comparing credit 

usage across depository institutions and 

over time. 

Third, the net debit caps, in 

particular, are based on customer 

account and operational management 

policies at a depository institution in 

addition to factors such as credit risk. 

Specifically, depository institutions are 

required under the PSR policy to take 

four factors into account when 

determining self-assessed caps, 

including their creditworthiness; 

intraday funds management and related 

controls; customer credit policies and 

related controls; and operating controls 

and contingency procedures. These 

factors figure prominently in 

supervisory guidance on managing risk 

in wholesale payments systems and are 

also based on recommendations 

provided to the Board by the banking 

industry in the 1980s.50 The issue of 

reputational risk is also a factor in 

current supervisory guidance. The 

process of establishing and renewing 

caps compels a depository institution 

and its management to focus on a range 

of interrelated aspects of risk in 

controlling credit and operational 

exposures both to a depository 

institution and to Reserve Banks. 

Overall, there is a reasonable and 

prudent basis for placing caps on 

collateralized overdrafts. Hence there is 

also a reasonable and prudent basis for 

placing caps on overdrafts that are 

collateralized voluntarily or not 

collateralized at all.51 The Board 

recognizes that other central banks have 

not employed net debit caps in addition 

to collateral in managing risk from 

intraday credit. Most central banks seem 

to have viewed the provision of intraday 

credit as a simple extension of practices 

with respect to overnight credit policy. 

These central banks, however, have 

adopted mandatory collateral policies 

and typically accept a much smaller 

range of collateral than the Reserve 

Banks. Further, some major central 

banks have not had the technical 

capability to conduct the 

comprehensive centralized tracking of 

intraday credit extensions that has been 

developed by the Federal Reserve over 

the past twenty years. 

Lastly, the Board considered the 

FBOs’ request to increase the fractions 

used to calculate the U.S. capital 

equivalency in determining net debit 

caps. Under the current policy, the 

most-highly rated FBOs receive 35 

percent (instead of 100 percent) of their 

worldwide capital for the U.S. capital 

equivalency. FBOs with weaker ratings 

receive lower measures of U.S. capital 

equivalency. In 2007, FBOs as a group 

incurred average peak overdrafts that 

were less than 50 percent of their singleday capacity. A few FBOs may approach 

their cap limits on certain liquidityintensive payment days, but it does not 

appear that FBOs are generally 

constrained by current cap levels. The 

Board recognizes, however, that the 

behavioral changes of individual FBOs 

and other depository institutions 

following a change in daylight overdraft 

policy are somewhat uncertain. For 

example, some institutions may prefer 

to release payments more quickly, 

incurring periods of increased daylight 

overdrafts, if they have the capacity to 

do so. To facilitate the earlier release of 

payments, the Board is proposing to 

streamline the process for the maximum 

daylight overdraft capacity (max cap) 

program, which provides additional 

capacity on a fully collateralized basis, 

for certain FBOs (discussed in the next 

section). 

G. Maximum daylight overdraft 

capacity. Currently, depository 

institutions with self-assessed net debit 

caps are eligible to pledge additional 

collateral to their Reserve Banks to 

secure intraday credit in excess of their 

net debit cap under the max cap 

program.52 As part of the consultation 

process, the Board received two 

comments on the max cap program. The 

commenters indicated preferences for 

greater flexibility and consistency across 

Reserve Banks in the implementation of 

the program. 

Under the new strategy, the max cap 

would continue to act as a tool to 

provide healthy institutions with 

flexibility in addressing their intraday 

liquidity needs. In particular, the Board 

proposes to take a more-favorable view 

of extending collateralized credit to 

financially sound institutions 

demonstrating a business need for 

additional daylight overdraft capacity. 

The current policy states: 

An institution with a self-assessed net 

debit cap that wishes to expand its daylight 

overdraft capacity by pledging collateral 

should consult with its administrative 

Reserve Bank. Institutions that request 

daylight overdraft capacity beyond the net 

debit cap must have already explored other 

alternatives to address their increased 

liquidity needs. The Reserve Banks will work 

with an institution that requests additional 

daylight overdraft capacity to determine the 

appropriate maximum daylight overdraft 

capacity level. In considering the 

institution’s request, the Reserve Bank will 

evaluate the institution’s rationale for 

requesting additional daylight overdraft 

capacity as well as its financial and 

supervisory information. 

The Board proposes to remove the 

requirement that institutions must have 

already explored other alternatives to 

address their increased liquidity needs. 

This statement is inconsistent with the 

proposed strategic direction of the new 

policy. A depository institution 

interested in obtaining a max cap would 

still need to contact its administrative 

Reserve Bank, which would work with 

the institution to determine an 

appropriate capacity level and would 

assess relevant financial and 

supervisory information in making such 

a credit decision. 

In addition, the Board proposes 

allowing an FBO that is a financial 

holding company or SOSA 1-rated 

institution to request from its 

administrative Reserve Bank a max cap 

without documenting a specific 

business need for additional capacity or 

providing a max cap board of directors 

resolution.53 The streamlined max cap 

would enable these FBOs to acquire 

additional capacity that in total would 

provide up to 100 percent of worldwide 

capital times the self-assessed cap 

multiple. A financial holding company 

is currently eligible for uncollateralized 

capacity of 35 percent of worldwide 


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54A SOSA–1 rated institution is eligible for 

uncollateralized capacity of 25 percent of 

worldwide capital times the cap multiple. The 

streamlined max cap would provide additional 

collateralized capacity of 75 percent of worldwide 

capital times the cap multiple. 55See 59 CFR 8979, February 24, 1994. 

capital times the cap multiple. The 

streamlined max cap would provide 

additional collateralized capacity of 65 

percent of worldwide capital times the 

cap multiple.54 While streamlined, the 

Reserve Bank would retain the right to 

assess the ability of eligible FBOs to 

manage the intraday capacity permitted 

by the max cap as part of reviewing 

financial and supervisory information. 

Specifically, the Reserve Bank, in 

consultation with the home country 

supervisor, would engage in initial as 

well as periodic dialogue with the 

institution that is analogous to the 

periodic review of liquidity plans 

performed with U.S. institutions to 

ensure the institution’s intraday 

liquidity risk is managed appropriately. 

The Board believes the streamlined 

max cap is appropriate for the group of 

FBOs with which the Reserve Banks 

have lower supervisory concerns. If an 

FBO requests capacity in excess of 100 

percent of worldwide capital times the 

self-assessed cap multiple, however, it 

would be subject to the full max cap 

process applicable to all institutions. 

H. Foreign Banking Organizations. 

The fractional allowance for worldwide 

capital of FBOs used in calculating net 

debit caps and deductibles historically 

has been based on risk differences 

between FBOs and U.S.-chartered 

depository institutions. The Federal 

Reserve’s access to supervisory 

information on FBOs is generally not as 

timely or complete as the information 

about U.S.-chartered institutions. In 

addition, the Federal Reserve incurs 

legal risk with respect to the application 

of foreign insolvency laws to FBOs. The 

existing cap limit and daylight overdraft 

fee have helped to control credit risk 

from FBOs to the Reserve Banks. 

The Board, however, is proposing 

several changes to the treatment of FBOs 

under the PSR policy that would 

address the concerns of the FBOs while 

managing the risk to the Reserve Banks. 

The Board believes that by eliminating 

the deductible for all depository 

institutions and providing free 

collateralized intraday credit to eligible 

depository institutions, including FBOs, 

the proposed policy changes would 

address the negative incentive effects of 

the deductible calculations that the 

commenters have identified. In 

addition, as discussed in the previous 

section, the Board proposes to 

streamline the max cap process for 

certain FBOs. Today, if an FBO is 

constrained by the cap limit on a 

frequent basis or on specific days, it 

may apply to its Reserve Bank for a max 

cap. While the Board believes this 

program has provided sufficient 

flexibility for FBOs to obtain additional 

capacity, the Board recognizes that the 

business case and board of directors 

resolution required to obtain a max cap 

could be slow or cumbersome. This 

procedure may not be warranted for 

financial holding companies and 

SOSA–1-rated FBOs to acquire 

additional capacity that in total 

provides up to 100 percent of 

worldwide capital times the selfassessed cap multiple. 

I. Penalty fees. Institutions that do not 

have regular access to the discount 

window are not eligible under the PSR 

policy to incur daylight overdrafts. In 

1994, the Board announced that it 

would apply a penalty fee to these 

institutions if they did incur daylight 

overdrafts.55 The Board believed that 

the penalty rate would provide 

incentives to these institutions to avoid 

situations that could cause a daylight 

overdraft. The penalty rate adopted by 

the Board was equal to the regular 

daylight overdraft fee plus 100 basis 

points. Thus, given the proposed 

increase in the fee for uncollateralized 

daylight overdrafts, the Board proposes 

to increase the penalty fee 

correspondingly from 136 to 150 basis 

points. 

J. Timing considerations and issues 

for Reserve Bank and depository 

institution implementation. The Reserve 

Banks will need a significant lead time 

to adjust internal processes and systems 

to the proposed PSR policy changes. 

These changes will affect the Reserve 

Banks’ credit risk management and 

accounting software applications. The 

Board anticipates that institutions’

systems could also require some 

adjustments. The Board expects that a 

revised PSR policy could be 

implemented in approximately two 

years from the announcement of a final 

rule. The Board, however, could 

implement the proposed changes to the 

max cap program for FBOs on an earlier 

date. 

V. Questions 

The Board requests comments on all 

aspects of the proposed PSR policy 

changes, including the new strategy, 

collateral, fees for collateralized 

daylight overdrafts, fees for 

uncollateralized daylight overdrafts, net 

debit caps, max caps, deductibles, fee 

waivers, penalty fees, and 

implementation timeline. 

In addition to comments on all 

aspects of the proposed PSR policy 

changes, the Board would appreciate 

responses to the following questions. 

General 

(1) Does your institution believe that 

the introduction of a zero fee for 

collateralized daylight overdrafts will 

contribute to an overall reduction in 

liquidity, operational, and credit risks in 

the payments system? Would it reduce 

these risks for depository institutions, 

their customers, or financial utilities? 

(2) What procedural or systems 

changes do you expect to make as a 

result of this proposed policy change? 

Collateral 

(3) Does your institution regularly use 

Federal Reserve daylight credit, and 

does your institution currently have 

sufficient unencumbered eligible 

collateral to pledge to the Reserve Banks 

to take advantage of a zero fee for 

collateralized overdrafts? By your 

estimate, what proportion of your 

expected average and peak overdraft 

would you intend to collateralize? 

(4) Would your institution’s intraday 

credit use increase or decrease from 

current levels? Do you expect the 

intraday credit usage of depository 

institutions as a group to increase or 

decrease from current levels? 

(5) While the proposal envisages no 

fee for collateralized overdrafts, 

institutions will face an opportunity 

cost to pledge collateral. How difficult 

or costly would it be to collateralize 

daylight overdrafts? What opportunity 

costs would your institution face in 

pledging (additional) eligible assets to 

the Reserve Bank to collateralize 

daylight overdrafts? What are the costs 

of entering into the Reserve Banks’

borrowing documents? 

(6) How would the adoption of this 

new PSR strategy, which explicitly links 

collateral to daylight overdrafts and 

pricing of daylight overdrafts, affect the 

availability of collateral for other 

financial market activity? How might it 

affect other creditors and other 

payments system participants? 

(7) What (additional) collateral 

management capabilities would your 

institution expect of its Reserve Bank 

(such as changes to the frequency or 

means of obtaining collateral reports, 

the ability to move directly and quickly 

collateral in and out of pledge accounts, 

and so on)? 

(8) If you do not currently have a 

borrowing agreement or pledge any 

collateral, would you expect to do so? 

If so, would the rationale rest on the use 

of daylight overdrafts or overnight 

extensions of credit? 


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56These procedures are described in the Board’s 

policy statement ‘‘The Federal Reserve in the 

Payments System,’’ as revised in March 1990. (55 

FR 11648, March 29, 1990). 

Pricing 

(9) To what extent would your 

institution make payments earlier in the 

day as a result of the proposed pricing 

changes? If your institution holds 

payments in a liquidity queue, would 

your institution continue to hold 

payments, particularly large-value 

payments, in a liquidity queue under 

the proposed policy changes? If so, 

under what circumstances would your 

institution continue to queue payments? 

What further steps would encourage 

queue reductions? 

(10) Does your institution believe that 

the introduction of a zero fee for 

collateralized daylight overdrafts could 

lead to changes in practices for 

returning early securities used in 

repurchase agreements? What changes 

might institutions expect? 

(11) Does your institution believe that 

the introduction of a zero fee for 

collateralized daylight overdrafts and 

the higher (50 basis point) fee for 

uncollateralized daylight overdrafts 

could lead to changes in practices for 

the early return of fed funds loans? 

What changes might institutions expect? 

(12) If your institution would face 

potentially higher fees on its daylight 

overdrafts, how will your institution 

adjust its collateral position or 

payments activities in response to the 

Board’s proposed fees? 

VI. Competitive Impact Analysis 

The Board has established procedures 

for assessing the competitive impact of 

a rule or policy change that has a 

substantial effect on payments systems 

participants.56 Under these procedures, 

the Board assesses whether a change 

would have had a direct and material 

adverse effect on the ability of other 

service providers to compete with the 

Federal Reserve in providing similar 

services due to differing legal powers or 

constraints or due to a dominant market 

position of the Federal Reserve deriving 

from such differences. If no reasonable 

modification would mitigate the adverse 

competitive effects, the Board will 

determine whether the expected 

benefits are significant enough to 

proceed with the change despite the 

adverse effects. 

Intraday balances of central bank 

money help ensure the smooth flow of 

payments systems whether operated by 

the Reserve Banks or private-sector 

clearing and settlement systems. The 

demand for intraday balances at the 

Reserve Banks for processing payments 

for private-sector clearing and 

settlement systems can substantially 

exceed the supply of overnight balances 

in Federal Reserve accounts, making 

intraday credit from the Reserve Banks 

the key marginal source of intraday 

funding for the market and for making 

payments, particularly over the Reserve 

Banks’ payments systems. For some 

large users of intraday credit, the 

proposed PSR policy changes may result 

in a reduction in daylight overdraft fees 

and thus lower explicit costs of using 

central bank money to fund payments 

activity. The lower explicit cost of using 

intraday balances of central bank money 

will lower the implicit cost of using the 

Reserve Banks’ payments services. The 

Board, however, does not believe this 

lower cost will have an adverse material 

effect on the ability of other service 

providers to compete with the Reserve 

Banks because private-sector clearing 

and settlement systems will gain from 

the lower explicit cost of funding net 

debit caps and other risk and 

operational controls employed by those 

systems. Generally, the Board expects 

that both the Reserve Banks and privatesector clearing and settlement systems 

will benefit to some extent from the 

reduced costs for daylight overdrafts. 

VII. Paperwork Reduction Act 

In accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 3506; 

5 CFR 1320 Appendix A.1), the Board 

reviewed the proposed PSR policy 

under the authority delegated to the 

Board by the Office of Management and 

Budget. No collection of information 

pursuant to the Paperwork Reduction 

Act is contained in the policy statement. 

VIII. Appendix I 

The Board has identified five major 

concerns related to risk or efficiency 

that together suggest a change in the 

Federal Reserve’s approach to the 

provision of intraday credit and the PSR 

policy is warranted at this time. These 

concerns include the declining level of 

overnight balances, the intraday funding 

needs of financial utilities, payments 

delays, continued growth in Reserve 

Bank credit exposure, and cost burden 

on the payments system. 

A. Level of overnight balances. First, 

the current level of overnight reserve 

and clearing balances is not sufficient to 

meet the intraday liquidity needs of the 

banking industry and the payments 

system. In 1988, overnight balances held 

at the Reserve Banks were 

approximately $39 billion. Since that 

time, changes in market practices 

(especially the introduction of retail 

sweep programs) and reserve 

requirements have reduced overnight 

balances to an average of approximately 

$16 billion in 2007; average daylight 

overdraft and (average) peak daylight 

overdrafts in 2007 were four and ten 

times overnight (closing) balances, 

respectively. 


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57The use of intraday balances of central bank 

money to manage risk is explicitly endorsed by 

international risk standards applicable to securities 

settlement systems such as DTC and incorporated 

in the Board’s PSR policy. See also 

‘‘Recommendations for securities settlement 

systems,’’ Committee on Payment and Settlement 

Systems and Technical Committee of the 

International Organization of Securities 

Commissions, Bank for International Settlements, 

November 2001. 

58 DTC is not permitted to incur daylight 

overdrafts. It ends each day with a positive balance 

close to zero in its clearing account. 

B. Intraday funding of financial 

utilities. Second, with the 

encouragement of the Federal Reserve 

and the industry, virtually all 

commercial paper is now held at DTC 

in book-entry form and issued and paid 

through that organization. In addition, 

trades of most publicly listed stocks and 

corporate bonds are also settled through 

DTC. As a result, DTC’s members 

transfer substantial sums over the 

Fedwire funds transfer system to DTC’s 

clearing account at the Federal Reserve 

Bank of New York beginning in the 

early afternoon to help meet DTC’s riskmanagement requirements.57 Most of 

these funds are not released by DTC 

back to the market until final DTC 

settlement occurs around 4:30 p.m.58 As 

a result, for most of the afternoon, the 

demand for intraday balances at the 

Reserve Banks for processing other 

payments far exceeds the supply of 

overnight balances in Federal Reserve 

accounts, making intraday credit from 

the Reserve Banks the key marginal 

source of intraday funding for the 

market and for making payments, 

particularly over the Federal Reserve’s 

payments systems. Under these 

circumstances, the provision of 

substantial amounts of daylight balances 

and credit by the Reserve Banks is 

necessary for the smooth functioning of 

Fedwire and the payments system more 

broadly. Private-sector payments 

systems have created a structural 

demand for daylight central bank credit 

averaging about $50 billion per day to 

support their settlement and risk 

management activities. On peak days, 

this demand can exceed $150 billion. 

The large magnitude of these amounts is 

inconsistent with the premise of the 

current PSR policy that relatively few 

institutions should rely on daylight 

credit from the Federal Reserve and use 

should be minimal. 

C. Payments delays. Third, the policy 

of pricing daylight overdrafts and the 

implied quantity of intraday credit 

supplied to the market has encouraged 

depository institutions to delay sending 

Fedwire payments until later in the 

operating day, creating added 

operational risk for the markets. The 

concern that pricing would cause 

payments delays has been a longstanding concern associated with the 

PSR policy. Although delays were not 

observed in the early years of the policy, 

in recent years depository institutions 

have sent an increasing share of the 

value of payments made over the 

Fedwire funds transfer system later in 


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59 In 1995, the value of Fedwire funds transfers 

after 5 p.m. was approximately 16 percent. See 

Richards, Heidi Willmann, Daylight overdraft fees 

and the Federal Reserve’s Payment System Risk 

Policy, Federal Reserve Bulletin, December 1995. 

The Fedwire funds transfer system closes at 6:30 

p.m. 

60 Data are for funds transfers only and exclude 

transactions sent or received by CHIPS, DTC, or 

CLS Bank International (CLS). CLS, which is an 

Edge Corporation supervised by the Federal 

Reserve, offers payment-versus-payment settlement 

of foreign exchange trades. 61Payments may be held in several types of 

queues once the depository institution receives an 

instruction from a customer to make a Fedwire 

funds transfer. If a customer instructs the 

depository institution to make a payment and the 

customer does not have sufficient balances or 

intraday credit with the institution, it may hold the 

payment in a ‘‘credit queue’’ until funds become 

available. Once the payment is cleared from the 

credit queue, the depository institution may send 

the payment or may move the payment to another 

queue in its process, such as the liquidity queue. 

A depository institution may use the liquidity 

queue to manage its daylight overdraft position 

with the Reserve Bank. The liquidity queue can 

help the institution manage daylight overdraft fees, 

avoid cap breaches, manage bilateral exposures, and 

so on. 

the day. In the period 1985 to 1990, data 

indicate that about 14 percent of the 

value of daily Fedwire payments were 

sent after 5 p.m.59 The data in chart 2, 

however, indicate that the share of the 

value of Fedwire payments sent after 5 

p.m. has grown steadily, averaging 

about 22 percent by 1998 and increasing 

to about 32 percent by 2007. The chart 

illustrates that this growth is driven 

largely by the largest-valued payments 

(the 99th percentile), which averaged 

almost $1 billion in 2007. 

The PRC and WCAG study make clear 

that key depository institutions hold 

back (large-value) Fedwire funds 

transfers in so-called ‘‘liquidity queues’’

during the afternoon in order to manage 

their daylight overdraft levels and avoid 

fees.61 Additional funds transfers, 

which may be designated for CHIPS, 

Fedwire funds, or book transfers, are 

held in customer credit queues 

generally awaiting sufficient funds to be 

transferred to an account to release the 

payments. Modifications to the policy 

for providing intraday liquidity, 

coupled with more-efficient use of 

liquidity, could ease some of these 

problems. Daylight overdraft fees alone, 

however, are not responsible for the 

late-day concentration of payments. 

PRC/WCAG members report that an 

increasing number of large-value 

payments are now originated later in the 

day because of later investment 

activities in the financial market and 

late closing times for major settlement 

systems. 


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62See the Report of The Presidential Task Force 

on Market Mechanisms, January 1988, for a study 

of the 1987 stock market break. 

In addition, in its public comment 

letter the Federal Reserve Bank of 

Chicago identified the delay of timecritical funds transfers used to complete 

the daily cycle of collecting and 

disbursing margin payments in the 

derivatives markets as a further concern 

related to the general delay of largevalue payments. In particular, the 

Federal Reserve Bank of Chicago 

conducted a confidential study to 

determine the time elapsed between the 

delivery of payment instructions by 

clearing organizations to money 

settlement banks and the execution of 

those instructions in relation to the 

contractual commitments of these banks 

to make timely payments (within one 

hour). The study provides evidence of 

substantial delays in interbank 

balancing payments for the exchangetraded derivatives markets during a 

period when there were no major 

financial market disruptions. The 

comment letter states that ‘‘a nontrivial 

percentage was made exceptionally late 

(3 to 91⁄2 hours). Furthermore, we find 

that the payments associated with the 

biggest delays tend to have the largest 

dollar value.’’ Overall, the delay of key 

time-critical payments could be a source 

of added systemic risk during periods of 

financial turbulence, and concerns 

could extend to other organizations. 

These types of concerns clearly did arise 

in the 1987 stock market break.62

D. Long-term Reserve Bank intraday 

credit exposure. Fourth, the long-term 

trend in daylight overdrafts indicates 

that they have continued to grow in 

both nominal and real terms despite the 

Reserve Banks’ charging fees. Chart 3 

provides inflation-adjusted annual 

averages of average daylight overdraft 

values from 1986 to 2007. The 

annualized growth rate of these average 

daylight overdrafts for about the past ten 

years has been about same as the 

annualized growth rate of the combined 

value of Fedwire funds and securities 

transfers. Given the demand for intraday 

liquidity to make payments, it is not 

clear that a policy of continuing to rely 

heavily on charging fees for daylight 

overdrafts will be successful in limiting 

growth of the credit risk exposure of the 

Reserve Banks. 


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63While the fees have increased substantially 

over the past few years, the largest increase was 35 

percent on an annualized basis following the 

implementation of the new policy limiting 

overdrafts of government-sponsored enterprises in 

July 2006. The fee increase is not surprising because 

the policy shifted the provision of intraday credit 

from the Reserve Banks to depository institutions. 

The PSR policy change for government-sponsored 

enterprises and certain international organizations 

is available at http://www.federalreserve.gov/ 

boarddocs/press/other/2004/20040205/default.htm. 

(See also 69 FR 57917, September 28, 2004.) 

E. Cost burden on the payments 

system. Fifth, the policy of charging fees 

has become a significant cost burden on 

the banking industry and the payments 

system. The Federal Reserve has 

collected over $450 million in daylight 

overdraft fees from the beginning of the 

pricing program in 1994 through the 

end of 2007. The fees collected from 

depository institutions, however, have 

increased almost 20 percent per year on 

a compound annualized basis since 

2003, with approximately $65 million 

collected in 2007. Chart 4 illustrates this 

substantial growth in fees, especially 

over the past several years.63 To date, no 

losses have been associated with the 

provision of daylight overdraft credit. 

The growing cost of the daylight 

overdraft fees to the industry raises the 

question of whether there is a lessexpensive and more-effective way to 

manage risk. 

Overall, the challenges with the 

existing PSR policy suggest that 

significant changes are justified in order 

to advance its overarching risk and 

efficiency objectives. 

IX. Federal Reserve Policy on Payments 

System Risk 

If the Board adopted these proposed 

changes, it would amend the ‘‘Federal 

Reserve Policy on Payments System 

Risk’’ Section II as follows. 

Introduction [Revised] 

Risks in Payments and Settlement Systems 

[Revised] 

I. Risk Management in Payments and 

Settlement Systems [No Change] 

A. Scope 

B. General policy expectations 

C. Systemically important systems 

1. Principles for systemically important 

payments systems 

2. Minimum standards for systemically 

important securities settlement systems 

and central counterparties 

3. Self-assessments by systemically 

important systems 

II. Federal Reserve Intraday Credit Policies [II 

and II B through II G Revised] 

A. Daylight overdraft definition and 

measurement [No Change] 

B. Collateral 

C. Pricing 

D. Net debit caps 


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64For the Board’s long-standing objectives in the 

payments system, see ‘‘The Federal Reserve in the 

Payments System,’’ September 2001, FRRS 9–1550, 

available at http://www.federalreserve.gov/ 

paymentsystems/pricing/frpaysys.htm. 

65To assist depository institutions in 

implementing this part of the Board’s payments 

system risk policy, the Federal Reserve has 

prepared two documents, the ‘‘Overview of the 

Federal Reserve’s Payments System Risk Policy’’

and the ‘‘Guide to the Federal Reserve’s Payments 

System Risk Policy,’’ which are available on line at 

http://www.federalreserve.gov/paymentsystems/ 

PSR/relpol.htm. The ‘‘Overview of the Federal 

Reserve’s Payments System Risk Policy’’

summarizes the Board’s policy on the provision of 

intraday credit, including net debit caps and 

daylight overdraft fees. The overview is intended 

for use by institutions that incur only small 

amounts of daylight overdrafts. The ‘‘Guide to the 

Federal Reserve’s Payments System Risk Policy’’

explains in detail how these policies apply to 

different institutions and includes procedures for 

completing a self-assessment and filing a cap 

resolution, as well as information on other aspects 

of the policy. 

66The term ‘‘depository institution,’’ as used in 

this policy, refers not only to institutions defined 

as ‘‘depository institutions’’ in 12 U.S.C. 

461(b)(1)(A), but also to U.S. branches and agencies 

of foreign banking organizations, Edge and 

agreement corporations, trust companies, and 

bankers’ banks, unless the context indicates a 

different reading. 

67The Board’s earlier strategy expected 

depository institutions to manage their accounts 

effectively while minimizing the use of Federal 

Reserve’s intraday credit. The rationale for the 

current strategy is that modern payments and 

settlement systems require significant amounts of 

intraday balances or liquidity for smooth operation. 

The role of the central bank is to meet reasonable 

market needs of participants in these systems for 

this liquidity. 

68These definitions of credit risk, liquidity risk, 

and legal risk are based upon those presented in the 

Core Principles for Systemically Important Payment 

Systems (Core Principles) and the 

Recommendations for Securities Settlement 

Systems (Recommendations for SSS). The 

definition of operational risk is based on the Basel 

Committee on Banking Supervision’s ‘‘Sound 

Practices for the Management and Supervision of 

Operational Risk,’’ available at http://www.bis.org/ 

publ/bcbs96.htm. Each of these definitions is 

largely consistent with those included in the 

Recommendations for Central Counterparties 

(Recommendations for CCP). 

1. Definition 

2. Cap categories 

a. Self-assessed 

b. De minimis 

c. Exempt-from-filing 

d. Zero 

3. Capital measure 

a. U.S.-chartered institutions 

b. U.S. branches and agencies of foreign 

banks 

E. Maximum daylight overdraft capacity 

1. General procedure 

2. Streamlined procedure for certain FBOs 

F. Special situations 

1. Edge and agreement corporations 

2. Bankers’ banks 

3. Limited-purpose trust companies 

4. Government-sponsored enterprises and 

international organizations 

5. Problem institutions 

G. Monitoring 

1. Ex post 

2. Real time 

3. Multi-district institutions 

H. Transfer-size limit on book-entry 

securities [No Change] 

Introduction 

Payments and settlement systems are 

critical components of the nation’s 

financial system. The smooth 

functioning of these systems is vital to 

the financial stability of the U.S. 

economy. Given the importance of these 

systems, the Board has developed this 

policy to address the risks that 

payments and settlement activity 

present to the financial system and to 

the Federal Reserve Banks (Reserve 

Banks). 

In adopting this policy, the Board’s 

objectives are to foster the safety and 

efficiency of payments and settlement 

systems. These policy objectives are 

consistent with (1) the Board’s longstanding objectives to promote the 

integrity, efficiency, and accessibility of 

the payments mechanism; (2) industry 

and supervisory methods for risk 

management; and (3) internationally 

accepted risk management principles 

and minimum standards for 

systemically important payments and 

settlement systems.64

Part I of this policy sets out the 

Board’s views, and related principles 

and minimum standards, regarding the 

management of risks in payments and 

settlement systems, including those 

operated by the Reserve Banks. In 

setting out its views, the Board seeks to 

encourage payments and settlement 

systems, and their primary regulators, to 

take the principles and minimum 

standards in this policy into 

consideration in the design, operation, 

monitoring, and assessing of these 

systems. The Board also will be guided 

by this part, in conjunction with 

relevant laws and other Federal Reserve 

policies, when exercising its authority 

over certain systems or their 

participants, when providing payments 

and settlement services to systems, or 

when providing intraday credit to 

Federal Reserve account holders. 

Part II of this policy governs the 

provision of intraday credit or ‘‘daylight 

overdrafts’’ in accounts at the Reserve 

Banks and sets out the general methods 

used by the Reserve Banks to control 

their intraday credit exposures.65 Under 

this part, the Board explicitly recognizes 

that the Federal Reserve has an 

important role in providing intraday 

balances and credit to foster the smooth 

operation of the payments system. The 

Reserve Banks provide intraday 

balances by way of supplying 

temporary, intraday credit to healthy 

depository institutions, predominantly 

through collateralized intraday 

overdrafts at zero price.66, 67 The Board 

believes that such a strategy enhances 

intraday liquidity, while controlling risk 

to the Reserve Banks. Over time, the 

Board aims to reduce the reliance of the 

banking industry on uncollateralized 

intraday credit by providing incentives 

to collateralize daylight overdrafts. The 

Board also aims to limit the burden of 

the policy on healthy depository 

institutions that use small amounts of 

intraday credit. 

Through this policy, the Board 

expects financial system participants, 

including the Reserve Banks, to reduce 

and control settlement and systemic 

risks arising in payments and settlement 

systems, consistent with the smooth 

operation of the financial system. This 

policy is designed to provide intraday 

balances and credit while controlling 

the Reserve Bank risk by (1) making 

financial system participants and 

system operators aware of the types of 

basic risks that arise in the settlement 

process and the Board’s expectations 

with regard to risk management, (2) 

setting explicit risk management 

expectations for systemically important 

systems, and (3) establishing the policy 

conditions governing the provision of 

Federal Reserve intraday credit to 

account holders. The Board’s adoption 

of this policy in no way diminishes the 

primary responsibilities of financial 

system participants generally and 

settlement system operators, 

participants, and Federal Reserve 

account holders more specifically, to 

address the risks that may arise through 

their operation of, or participation in, 

payments and settlement systems. 

Risks in Payments and Settlement 

Systems 

The basic risks in payments and 

settlement systems are credit risk, 

liquidity risk, operational risk, and legal 

risk. In the context of this policy, these 

risks are defined as follows.68

Credit Risk. The risk that a 

counterparty will not settle an 

obligation for full value either when due 

or anytime thereafter. 

Liquidity Risk. The risk that a 

counterparty will not settle an 

obligation for full value when due. 

Operational Risk. The risk of loss 

resulting from inadequate or failed 

internal processes, people, and systems, 

or from external events. This type of risk 

includes various physical and 

information security risks. 

Legal Risk. The risk of loss because of 

the unexpected application of a law or 

regulation or because a contract cannot 

be enforced. 


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69The term ‘‘financial institution,’’ as used in this 

policy, includes a broad array of types of 

organizations that engage in financial activity, 

including depository institutions and securities 

dealers. 

70Several existing regulatory and bank 

supervision guidelines and policies also are 

directed at institutions’ management of the risks 

posed by interbank payments and settlement 

activity. For example, Federal Reserve Regulation F 

(12 CFR 206) directs insured depository institutions 

to establish policies and procedures to avoid 

excessive exposures to any other depository 

institutions, including exposures that may be 

generated through the clearing and settlement of 

payments. 

71Available at http://www.federalreserve.gov/ 

paymentsystems/PSR/relpol.htm. 

72Collateral is also used to manage risk posed by 

daylight overdrafts of problem institutions 

(institutions in a weak or deteriorating financial 

condition), entities not eligible for Federal Reserve 

intraday credit (see Section II.F.) and institutions 

that have obtained maximum daylight overdraft 

capacity (see Section II.E.). 

73See http://www.frbdiscountwindow.org/ for 

information on the discount window and PSR 

collateral acceptance policy and collateral margins. 

74 In-transit securities are book-entry securities 

transferred over the Fedwire Securities Service that 

have been purchased by a depository institution but 

not yet paid for or owned by the institution’s 

customers. 

These risks arise between financial 

institutions as they settle payments and 

other financial transactions and must be 

managed by institutions, both 

individually and collectively.69, 70

Multilateral payments and settlement 

systems, in particular, may increase, 

shift, concentrate, or otherwise 

transform risks in unanticipated ways. 

These systems also may pose systemic 

risk to the financial system where the 

inability of a system participant to meet 

its obligations when due may cause 

other participants to be unable to meet 

their obligations when due. The failure 

of one or more participants to settle 

their payments or other financial 

transactions, in turn, could create credit 

or liquidity problems for other 

participants, the system operator, or 

depository institutions. Systemic risk 

might lead ultimately to a disruption in 

the financial system more broadly or 

undermine public confidence in the 

nation’s financial infrastructure. 

These risks stem, in part, from the 

multilateral and time-sensitive credit 

and liquidity interdependencies among 

financial institutions. These 

interdependencies often create complex 

transaction flows that, in combination 

with a system’s design, can lead to 

significant demands for intraday credit, 

either on a regular or extraordinary 

basis. The Board explicitly recognizes 

that the Federal Reserve has an 

important role in providing intraday 

balances and credit to foster the smooth 

operation of the payments system. To 

the extent that financial institutions or 

the Reserve Banks are the direct or 

indirect source of intraday credit, they 

may face a direct risk of loss if daylight 

overdrafts are not extinguished as 

planned. In addition, measures taken by 

Reserve Banks to limit their intraday 

credit exposures may shift some or all 

of the associated risks to private-sector 

systems. 

The smooth functioning of payments 

and settlement systems is also critical to 

certain public policy objectives in the 

areas of monetary policy and banking 

supervision. The effective 

implementation of monetary policy, for 

example, depends on both the orderly 

settlement of open market operations 

and the efficient distribution of reserve 

balances throughout the banking system 

via the money market and payments 

system. Likewise, supervisory objectives 

regarding the safety and soundness of 

depository institutions must take into 

account the risks payments and 

settlement systems pose to depository 

institutions that participate directly or 

indirectly in, or provide settlement, 

custody, or credit services to, such 

systems. 

I. Risk Management in Payments and 

Settlement Systems [No Change] 

II. Federal Reserve Intraday Credit 

Policies [II and II B through II H 

Revised] 

This part outlines the methods used 

to provide intraday credit to ensure the 

smooth functioning of payments and 

settlement systems, while controlling 

credit risk to the Reserve Banks 

associated with such intraday credit. 

These methods include voluntary 

collateralization of intraday credit, a 

limit on total daylight overdrafts in 

institutions’ Federal Reserve accounts, 

and a fee for uncollateralized daylight 

overdrafts. This part also provides a fee 

waiver to limit the impact of 

collateralization on depository 

institutions that use relatively small 

amounts of intraday credit. 

To assist institutions in implementing 

this part of the policy, the Federal 

Reserve has prepared two documents: 

the Overview of the Federal Reserve’s 

Payments System Risk Policy on 

Intraday Credit (Overview) and the 

Guide to the Federal Reserve’s Payments 

System Risk Policy on Intraday Credit 

(Guide).71 The Overview summarizes 

the Board’s policy on the provision of 

intraday credit, including net debit 

caps, daylight overdraft fees for 

collateralized and uncollateralized 

overdrafts, and the fee waiver. It is 

intended for use by institutions that 

incur only small amounts of daylight 

overdrafts. The Guide explains in detail 

how these policies apply to different 

institutions and includes procedures for 

completing a self-assessment and filing 

a cap resolution, as well as information 

on other aspects of the policy. 

A. Daylight Overdraft Definition and 

Measurement [No change] 

B. Collateral 

To help meet institutions’ demand for 

intraday balances while mitigating 

Reserve Bank credit risk, the Board 

supplies intraday balances 

predominantly through explicitly 

collateralized daylight overdrafts 

provided by Reserve Banks to healthy 

depository institutions at a zero fee.72

The Board offers pricing incentives to 

encourage greater collateralization (see 

section II.C.). To avoid disrupting the 

operation of the payments system and 

increasing the cost burden on a large 

number of institutions using small 

amounts of daylight overdrafts, the 

Board allows the use of collateral to be 

voluntary. 

Collateral eligibility and margins 

remain the same for PSR policy 

purposes as for the discount window.73

Unencumbered discount window 

collateral can be used to collateralize 

daylight overdrafts. The pledge of intransit securities remains an eligible 

collateral option for PSR purposes at 

Reserve Banks’ discretion.74

C. Pricing 

Under the voluntary collateralization 

regime, the fee for collateralized 

overdrafts is set at zero, while the fee for 

uncollateralized overdrafts is 50 basis 

points. The two-tiered fee for 

collateralized and uncollateralized 

overdrafts is intended to provide a 

strong incentive for a depository 

institution to pledge collateral to its 

Reserve Bank to reduce or eliminate the 

institution’s uncollateralized daylight 

overdrafts and associated charges for its 

use of intraday credit. 

Reserve Banks charge institutions for 

daylight overdrafts incurred in their 

Federal Reserve accounts. For each twoweek reserve-maintenance period, the 

Reserve Banks calculate and assess 

daylight overdraft fees, which are equal 

to the sum of any daily uncollateralized 

daylight overdraft charges during the 

period. 

Daylight overdraft fees for 

uncollateralized overdrafts (or the 

uncollateralized portion of a partially 

collateralized overdraft) are calculated 

using an annual rate of 50 basis points, 

quoted on the basis of a 24-hour day and 

a 360-day year. To obtain the effective 

annual rate for the standard Fedwire 


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75A change in the length of the scheduled 

Fedwire operating day should not significantly 

change the amount of fees charged because the 

effective daily rate is applied to average daylight 

overdrafts, whose calculation would also reflect the 

change in the operating day. 

76Under the current 21.5-hour Fedwire operating 

day, the effective daily daylight-overdraft rate is 

truncated to 0.0000124. 

77The waiver shall not result in refunds or credits 

to an institution. 

78The fee waiver is not available to Edge and 

agreement corporations, bankers’ banks that have 

not waived their exemption from reserve 

requirements, limited-purpose trust companies, and 

government-sponsored enterprises and 

international organizations. These types of 

institutions do not have regular access to the 

discount window and, therefore, are expected not 

to incur daylight overdrafts in their Federal Reserve 

accounts. 

79The net debit cap for the exempt-from-filing 

category is equal to thelesser of $10 million or 0.20 

multiplied by the capital measure. 

80This assessment should be done on an 

individual-institution basis, treating as separate 

entities each commercial bank, each Edge 

corporation (and its branches), each thrift 

institution, and so on. An exception is made in the 

case of U.S. branches and agencies of FBOs. 

Because these entities have no existence separate 

from the FBO, all the U.S. offices of FBOs 

(excluding U.S.-chartered bank subsidiaries and 

U.S.-chartered Edge subsidiaries) should be treated 

as a consolidated family relying on the FBO’s 

capital. 

81An insured depository institution is (1) ‘‘well 

capitalized’’ if it significantly exceeds the required 

minimum level for each relevant capital measure, 

(2) ‘‘adequately capitalized’’ if it meets the required 

minimum level for each relevant capital measure, 

(3) ‘‘undercapitalized’’ if it fails to meet the 

required minimum level for any relevant capital 

measure, (4) ‘‘significantly undercapitalized’’ if it is 

significantly below the required minimum level for 

any relevant capital measure, or (5) ‘‘critically 

undercapitalized’’ if it fails to meet any leverage 

limit (the ratio of tangible equity to total assets) 

specified by the appropriate federal banking agency, 

in consultation with the FDIC, or any other relevant 

capital measure established by the agency to 

determine when an institution is critically 

undercapitalized (12 U.S.C. 1831o). 

operating day, the 50-basis-point annual 

rate is multiplied by the fraction of a 24- 

hour day during which Fedwire is 

scheduled to operate. For example, 

under a 21.5-hour scheduled Fedwire 

operating day, the effective annual rate 

used to calculate daylight overdraft fees 

equals 44.79 basis points (50 basis 

points multiplied by 21.5/24).75 The 

effective daily rate is calculated by 

dividing the effective annual rate by 

360.76 An institution’s daily daylight 

overdraft charge is equal to the effective 

daily rate multiplied by the institution’s 

average daily uncollateralized daylight 

overdraft. 

An institution’s average daily 

uncollateralized daylight overdraft is 

calculated by dividing the sum of its 

negative uncollateralized Federal 

Reserve account balances at the end of 

each minute of the scheduled Fedwire 

operating day by the total number of 

minutes in the scheduled Fedwire 

operating day. In this calculation, each 

positive end-of-minute balance in an 

institution’s Federal Reserve account is 

set to equal zero. Fully collateralized 

end-of-minute negative balances are 

similarly set to zero. 

The daily daylight overdraft charge is 

reduced by a fee waiver of $150, which 

is primarily intended to minimize the 

burden of the PSR policy on institutions 

that use small amounts of intraday 

credit. The waiver is subtracted from 

gross fees in a two-week reservemaintenance period.77

Certain institutions are subject to a 

penalty fee and modified daylight 

overdraft fee calculation as described in 

section II.F. The fee waiver is not 

available to these institutions.78

D. Net Debit Caps 

1. Definition 

In accord with sound risk 

management practices, to limit the 

amount of intraday credit that a Reserve 

Bank extends to an individual 

institution and the associated risk, each 

institution incurring daylight overdrafts 

in its Federal Reserve account must 

adopt a net debit cap, that is, a ceiling 

on the total daylight overdraft position 

that it can incur during any given day. 

If an institution’s daylight overdrafts 

generally do not exceed the lesser of $10 

million or 20 percent of its capital 

measure, the institution may qualify for 

the exempt-from-filing cap. An 

institution must be financially healthy 

and have regular access to the discount 

window in order to adopt a net debit 

cap greater than zero or qualify for the 

filing exemption. 

An institution’s cap category and 

capital measure determine the size of its 

net debit cap. More specifically, the net 

debit cap is calculated as an 

institution’s cap multiple times its 

capital measure: 

net debit cap = 

cap multiple × capital measure 

Cap categories (see section II.D.2.) and 

their associated cap levels, set as 

multiples of capital measure, are listed 

below: 

NET DEBIT CAP MULTIPLES

Cap category Cap multiple 

High .......................... 2.25 

Above average ......... 1.875 

Average .................... 1.125 

De minimis ................ 0.4 

Exempt-from-filing 79 $10 million or 0.20 

Zero .......................... 0 

The cap is applied to the total of 

collateralized and uncollateralized 

daylight overdrafts. For the treatment of 

overdrafts that exceed the cap, see 

Section II.G. 

The Board’s policy on net debit caps 

is based on a specific set of guidelines 

and some degree of examiner oversight. 

Under the Board’s policy, a Reserve 

Bank may further limit or prohibit an 

institution’s use of Federal Reserve 

intraday credit if (1) the institution’s 

supervisor determines that the 

institution is unsafe or unsound; (2) the 

institution does not qualify for a 

positive net debit cap (see section 

II.D.2.); or (3) the Reserve Bank 

determines that the institution poses 

excessive risk. 

While capital measures differ, the net 

debit cap provisions of this policy apply 

similarly to foreign banking 

organizations (FBOs) as to U.S. 

institutions. The Reserve Banks will 

advise home-country supervisors of the 

daylight overdraft capacity of U.S. 

branches and agencies of FBOs under 

their jurisdiction, as well as of other 

pertinent information related to the 

FBOs’ caps. The Reserve Banks will also 

provide information on the daylight 

overdrafts in the Federal Reserve 

accounts of FBOs’ U.S. branches and 

agencies in response to requests from 

home-country supervisors. 

2. Cap Categories 

The policy defines the following six 

cap categories, described in more detail 

below: high, above average, average, de 

minimis, exempt-from-filing, and zero. 

The high, above average, and average 

cap categories are referred to as ‘‘selfassessed’’ caps. 

a. Self-assessed. In order to establish 

a net debit cap category of high, above 

average, or average, an institution must 

perform a self-assessment of its own 

creditworthiness, intraday funds 

management and control, customer 

credit policies and controls, and 

operating controls and contingency 

procedures.80 The assessment of 

creditworthiness is based on the 

institution’s supervisory rating and 

Prompt Corrective Action (PCA) 

designation.81 An institution may 

perform a full assessment of its 

creditworthiness in certain limited 

circumstances, for example, if its 

condition has changed significantly 

since its last examination or if it 

possesses additional substantive 

information regarding its financial 

condition. An institution performing a 

self-assessment must also evaluate its 

intraday funds-management procedures 

and its procedures for evaluating the 

financial condition of and establishing 


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82An FBO should undergo the same selfassessment process as a domestic bank in 

determining a net debit cap for its U.S. branches 

and agencies. Many FBOs, however, do not have the 

same management structure as U.S. institutions, 

and adjustments should be made as appropriate. If 

an FBO’s board of directors has a more limited role 

to play in the bank’s management than a U.S. board 

has, the self-assessment and cap category should be 

reviewed by senior management at the FBO’s head 

office that exercises authority over the FBO 

equivalent to the authority exercised by a board of 

directors over a U.S. institution. In cases in which 

the board of directors exercises authority equivalent 

to that of a U.S. board, cap determination should 

be made by the board of directors. 

83 In addition, for FBOs, the file that is made 

available for examiner review by the U.S. offices of 

an FBO should contain the report on the selfassessment that the management of U.S. operations 

made to the FBO’s senior management and a record 

of the appropriate senior management’s response or 

the minutes of the meeting of the FBO’s board of 

directors or other appropriate management group, at 

which the self-assessment was discussed. 

84Between examinations, examiners or Reserve 

Bank staff may contact an institution about its cap 

if there is other relevant information, such as 

statistical or supervisory reports, that suggests there 

may have been a change in the institution’s 

financial condition. 

intraday credit limits for its customers. 

Finally, the institution must evaluate its 

operating controls and contingency 

procedures to determine if they are 

sufficient to prevent losses due to fraud 

or system failures. The Guide includes 

a detailed explanation of the selfassessment process. 

Each institution’s board of directors 

must review that institution’s selfassessment and recommended cap 

category. The process of self-assessment, 

with board-of-directors review, should 

be conducted at least once in each 

twelve-month period. A cap 

determination may be reviewed and 

approved by the board of directors of a 

holding company parent of an 

institution, provided that (1) the selfassessment is performed by each entity 

incurring daylight overdrafts, (2) the 

entity’s cap is based on the measure of 

the entity’s own capital, and (3) each 

entity maintains for its primary 

supervisor’s review its own file with 

supporting documents for its selfassessment and a record of the parent’s 

board-of-directors review.82

In applying these guidelines, each 

institution should maintain a file for 

examiner review that includes (1) 

worksheets and supporting analysis 

used in its self-assessment of its own 

cap category, (2) copies of seniormanagement reports to the board of 

directors of the institution or its parent 

(as appropriate) regarding that selfassessment, and (3) copies of the 

minutes of the discussion at the 

appropriate board-of-directors meeting 

concerning the institution’s adoption of 

a cap category.83

As part of its normal examination, the 

institution’s examiners may review the 

contents of the self-assessment file.84

The objective of this review is to ensure 

that the institution has applied the 

guidelines appropriately and diligently, 

that the underlying analysis and method 

were reasonable, and that the resultant 

self-assessment was generally consistent 

with the examination findings. 

Examiner comments, if any, should be 

forwarded to the board of directors of 

the institution. The examiner, however, 

generally would not require a 

modification of the self-assessed cap 

category, but rather would inform the 

appropriate Reserve Bank of any 

concerns. The Reserve Bank would then 

decide whether to modify the cap 

category. For example, if the 

institution’s level of daylight overdrafts 

constitutes an unsafe or unsound 

banking practice, the Reserve Bank 

would likely assign the institution a 

zero net debit cap and impose 

additional risk controls. 

The contents of the self-assessment 

file will be considered confidential by 

the institution’s examiner. Similarly, the 

Federal Reserve and the institution’s 

examiner will hold the actual cap level 

selected by the institution confidential. 

Net debit cap information should not be 

shared with outside parties or 

mentioned in any public documents; 

however, net debit cap information will 

be shared with the home-country 

supervisor of U.S. branches and 

agencies of foreign banks. 

The Reserve Banks will review the 

status of any institution with a selfassessed net debit cap that exceeds its 

net debit cap during a two-week reservemaintenance period and will decide if 

additional action should be taken (see 

section II.G.). 

b. De minimis. Many institutions 

incur relatively small overdrafts and 

thus pose little risk to the Federal 

Reserve. To ease the burden on these 

small overdrafters of engaging in the 

self-assessment process and to ease the 

burden on the Federal Reserve of 

administering caps, the Board allows 

institutions that meet reasonable safety 

and soundness standards to incur de 

minimis amounts of daylight overdrafts 

without performing a self-assessment. 

An institution may incur daylight 

overdrafts of up to 40 percent of its 

capital measure if the institution 

submits a board-of-directors resolution. 

An institution with a de minimis cap 

must submit to its Reserve Bank at least 

once in each 12-month period a copy of 

its board-of-directors resolution (or a 

resolution by its holding company’s 

board) approving the institution’s use of 

intraday credit up to the de minimis 

level. The Reserve Banks will review the 

status of any institution with a de 

minimis net debit cap that exceeds its 

net debit cap during a two-week reservemaintenance period and will decide if 

additional action should be taken (see 

section II.G.). 

c. Exempt-from-filing. Institutions that 

only rarely incur daylight overdrafts in 

their Federal Reserve accounts that 

exceed the lesser of $10 million or 20 

percent of their capital measure are 

excused from performing selfassessments and filing board-ofdirectors resolutions with their Reserve 

Banks. This dual test of dollar amount 

and percent of capital measure is 

designed to limit the filing exemption to 

institutions that create only low-dollar 

risks to the Reserve Banks and that 

incur small overdrafts relative to their 

capital measure. 

The Reserve Banks will review the 

status of an exempt institution that 

incurs overdrafts in its Federal Reserve 

account in excess of $10 million or 20 

percent of its capital measure on more 

than two days in any two consecutive 

two-week reserve-maintenance periods. 

The Reserve Bank will decide whether 

the exemption should be maintained, 

the institution should be required to file 

for a cap, or counseling should be 

performed (see section II.G.). Granting of 

the exempt-from-filing net debit cap is 

at the discretion of the Reserve Bank. 

d. Zero. Some financially healthy 

institutions that could obtain positive 

net debit caps choose to have zero caps. 

Often these institutions have very 

conservative internal policies regarding 

the use of Federal Reserve intraday 

credit or simply do not want to incur 

daylight overdrafts and any associated 

daylight overdraft fees. If an institution 

that has adopted a zero cap incurs a 

daylight overdraft, the Reserve Bank 

counsels the institution and may 

monitor the institution’s activity in real 

time and reject or delay certain 

transactions that would cause an 

overdraft. If the institution qualifies for 

a positive cap, the Reserve Bank may 

suggest that the institution adopt an 

exempt-from-filing cap or file for a 

higher cap if the institution believes that 

it will continue to incur daylight 

overdrafts. 

In addition, a Reserve Bank may 

assign an institution a zero net debit 

cap. Institutions that may pose special 

risks to the Reserve Banks, such as those 

without regular access to the discount 

window, those incurring daylight 

overdrafts in violation of this policy, or 

those in weak financial condition, are 

generally assigned a zero cap (see 

section II.F.). Recently chartered 


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85The term ‘‘U.S. capital equivalency’’ is used in 

this context to refer to the particular capital 

measure used to calculate net debit caps and does 

not necessarily represent an appropriate capital 

measure for supervisory or other purposes. 

86The Gramm-Leach-Bliley Act defines a 

financial holding company as a bank holding 

company that meets certain eligibility requirements. 

In order for a bank holding company to become a 

financial holding company and be eligible to engage 

in the new activities authorized under the GrammLeach-Bliley Act, the Act requires that all 

depository institutions controlled by the bank 

holding company be well capitalized and well 

managed (12 U.S.C. 1841(p)). With regard to a 

foreign bank that operates a branch or agency or 

owns or controls a commercial lending company in 

the United States, the Act requires the Board to 

apply comparable capital and management 

standards that give due regard to the principle of 

national treatment and equality of competitive 

opportunity (12 U.S.C. 1843(l)). 

87The SOSA ranking is composed of four factors, 

including the FBO’s financial condition and 

prospects, the system of supervision in the FBO’s 

home country, the record of the home country’s 

government in support of the banking system or 

other sources of support for the FBO; and transfer 

risk concerns. Transfer risk relates to the FBO’s 

ability to access and transmit U.S. dollars, which 

is an essential factor in determining whether an 

FBO can support its U.S. operations. The SOSA 

ranking is based on a scale of 1 through 3, with 1 

representing the lowest level of supervisory 

concern. 

88The administrative Reserve Bank is responsible 

for the administration of Federal Reserve credit, 

reserves, and risk management policies for a given 

institution or other legal entity. 

89 Institutions have some flexibility as to the 

specific types of collateral they may pledge to the 

Reserve Banks; however, all collateral must be 

acceptable to the Reserve Banks. The Reserve Banks 

may accept securities in transit on the Fedwire 

book-entry securities system as collateral to support 

the maximum daylight overdraft capacity level. 

Securities in transit refer to book-entry securities 

transferred over the Fedwire Securities Service that 

have been purchased by an institution but not yet 

paid for and owned by the institution’s customers. 

90 Institutions may consider applying for a 

maximum daylight overdraft capacity level for 

daylight overdrafts resulting from Fedwire funds 

transfers, Fedwire book-entry securities transfers, 

National Settlement Service entries, and ACH credit 

originations. Institutions incurring daylight 

overdrafts as a result of other payment activity may 

be eligible for administrative counseling flexibility 

(59 FR 54915–18, Nov. 2, 1994). 

91Collateralized capacity, on any given day, 

equals the amount of collateral pledged to the 

Reserve Bank, not to exceed the difference between 

the institution’s maximum daylight overdraft 

capacity level and its net debit cap. 

institutions may also be assigned a zero 

net debit cap. 

3. Capital Measure 

As described above, an institution’s 

cap category and capital measure 

determine the size of its net debit cap. 

The capital measure used in calculating 

an institution’s net debit cap depends 

upon its chartering authority and homecountry supervisor. 

a. U.S.-chartered institutions. For 

institutions chartered in the United 

States, net debit caps are multiples of 

‘‘qualifying’’ or similar capital measures 

that consist of those capital instruments 

that can be used to satisfy risk-based 

capital standards, as set forth in the 

capital adequacy guidelines of the 

federal financial regulatory agencies. All 

of the federal financial regulatory 

agencies collect, as part of their required 

reports, data on the amount of capital 

that can be used for risk-based 

purposes—‘‘risk-based’’ capital for 

commercial banks, savings banks, and 

savings associations and total regulatory 

reserves for credit unions. Other U.S.- 

chartered entities that incur daylight 

overdrafts in their Federal Reserve 

accounts should provide similar data to 

their Reserve Banks. 

b. U.S. branches and agencies of 

foreign banks. For U.S. branches and 

agencies of foreign banks, net debit caps 

on daylight overdrafts in Federal 

Reserve accounts are calculated by 

applying the cap multiples for each cap 

category to the FBO’s U.S. capital 

equivalency measure.85 U.S. capital 

equivalency is equal to the following 

• 35 percent of capital for FBOs that 

are financial holding companies 

(FHCs) 86

• 25 percent of capital for FBOs that 

are not FHCs and have a strength of 

support assessment ranking (SOSA) of 

1 87

• 10 percent of capital for FBOs that 

are not FHCs and are ranked a SOSA 2 

• 5 percent of ‘‘net due to related 

depository institutions’’ for FBOs that 

are not FHCs and are ranked a SOSA 3 

An FBO that is a FHC or has a SOSA 

rating of 1 may be eligible for a 

streamlined procedure (see Section II.E.) 

for obtaining additional collateralized 

intraday credit under the maximum 

daylight overdraft capacity provision. 

Granting a net debit cap, or any 

extension of intraday credit, to an 

institution is at the discretion of the 

Reserve Bank. In the event a Reserve 

Bank grants a net debit cap or extends 

intraday credit to a financially healthy 

SOSA 3-ranked FBO, the Reserve Bank 

may require such credit to be fully 

collateralized, given the heightened 

supervisory concerns with SOSA 3- 

ranked FBOs. 

E. Maximum Daylight Overdraft 

Capacity 

The Board recognizes that while net 

debit caps provide sufficient liquidity to 

most institutions, some institutions may 

still experience liquidity pressures. The 

Board believes it is important to provide 

an environment in which payments 

systems may function effectively and 

efficiently and to remove barriers, as 

appropriate, to foster risk-reducing 

payments system initiatives. 

Consequently, certain institutions with 

self-assessed net debit caps may pledge 

collateral to their administrative Reserve 

Banks to secure daylight overdraft 

capacity in excess of their net debit 

caps, subject to Reserve Bank 

approval.88 89 This policy is intended to 

provide extra liquidity through the 

pledge of collateral to the few 

institutions that might otherwise be 

constrained from participating in riskreducing payments system initiatives.90

The Board believes that providing extra 

liquidity to these few institutions 

should help prevent liquidity-related 

market disruptions. 

1. General Procedure 

An institution with a self-assessed net 

debit cap that wishes to expand its 

daylight overdraft capacity by pledging 

collateral should consult with its 

administrative Reserve Bank. The 

Reserve Banks will work with an 

institution that requests additional 

daylight overdraft capacity to determine 

the appropriate maximum daylight 

overdraft capacity level. In considering 

the institution’s request, the Reserve 

Bank will evaluate the institution’s 

rationale for requesting additional 

daylight overdraft capacity as well as its 

financial and supervisory information. 

The financial and supervisory 

information considered may include, 

but is not limited to, capital and 

liquidity ratios, the composition of 

balance sheet assets, CAMELS or other 

supervisory ratings and assessments, 

and SOSA rankings (for U.S. branches 

and agencies of foreign banks). An 

institution approved for a maximum 

daylight overdraft capacity level must 

submit at least once in each twelvemonth period a board-of-directors 

resolution indicating its board’s 

approval of that level. 

If the Reserve Bank approves an 

institution’s request, the Reserve Bank 

approves a maximum daylight overdraft 

capacity level. The maximum daylight 

overdraft capacity is defined as follows: 

maximum daylight overdraft capacity = 

net debit cap + 

collateralized capacity 91

The Reserve Banks will review the 

status of any institution that exceeds its 

maximum daylight overdraft capacity 

limit during a two-week reservemaintenance period and will decide if 

the maximum daylight overdraft 

capacity should be maintained or if 

additional action should be taken (see 

section II.G.). 

Institutions with exempt-from-filing 

and de minimis net debit caps may not 

obtain additional daylight overdraft 


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92For example, a financial holding company is 

eligible for uncollateralized capacity of 35 percent 

of worldwide capital times the cap multiple. The 

streamlined max cap procedure would provide such 

an institution with additional collateralized 

capacity of 65 percent of worldwide capital times 

the cap multiple. 

93The liquidity reviews will be conducted by the 

administrative Reserve Bank, in consultation with 

each FBO’s home country supervisor. 

94The Reserve Banks act as fiscal agents for 

certain entities, such as government-sponsored 

enterprises (GSEs) and international organizations, 

whose securities are Fedwire-eligible but are not 

obligations of, or fully guaranteed as to principal 

and interest by, the United States. The GSEs 

include Fannie Mae, the Federal Home Loan 

Mortgage Corporation (Freddie Mac), entities of the 

Federal Home Loan Bank System (FHLBS), the 

Farm Credit System, the Federal Agricultural 

Mortgage Corporation (Farmer Mac), the Student 

Loan Marketing Association (Sallie Mae), the 

Financing Corporation, and the Resolution Funding 

Corporation. The international organizations 

include the World Bank, the Inter-American 

Development Bank, the Asian Development Bank, 

and the African Development Bank. The Student 

Loan Marketing Association Reorganization Act of 

1996 requires Sallie Mae to be completely 

privatized by 2008; however, Sallie Mae completed 

privatization at the end of 2004. The Reserve Banks 

no longer act as fiscal agents for new issues of Sallie 

Mae securities, and Sallie Mae is not considered a 

GSE. 

95Under the current 21.5-hour Fedwire operating 

day, the effective daily daylight-overdraft penalty 

rate is truncated to 0.0000373. 

96While daylight overdraft fees are calculated 

differently for these institutions than for 

institutions that have regular access to the discount 

window, overnight overdrafts at Edge and 

agreement corporations, bankers’ banks that are not 

subject to reserve requirements, limited-purpose 

trust companies, GSEs, and international 

organizations are priced the same as overnight 

overdrafts at institutions that have regular access to 

the discount window. 

97These institutions are organized under section 

25A of the Federal Reserve Act (12 U.S.C. 611–631) 

or have an agreement or undertaking with the Board 

under section 25 of the Federal Reserve Act (12 

U.S.C. 601–604(a)). 

capacity by pledging additional 

collateral without first obtaining a selfassessed net debit cap. Likewise, 

institutions that have voluntarily 

adopted zero net debit caps may not 

obtain additional daylight overdraft 

capacity without first obtaining a selfassessed net debit cap. Institutions that 

have been assigned a zero net debit cap 

by their administrative Reserve Bank are 

not eligible to apply for any daylight 

overdraft capacity. 

2. Streamlined Procedure for Certain 

FBOs 

An FBO that is a FHC or has a SOSA 

rating of 1 and has a self-assessed net 

debit cap may request from its Reserve 

Bank a streamlined procedure under the 

maximum daylight overdraft capacity 

provision. These FBOs are not required 

to provide documentation of the 

business need or obtain the board of 

directors’ resolution for collateralized 

capacity in an amount that exceeds its 

current net debit cap (which is based on 

up to 35 percent worldwide capital 

times its cap multiple), as long as the 

requested additional capacity is 100 

percent or less of worldwide capital 

times a self-assessed cap multiple.92 In 

order to ensure that intraday liquidity 

risk is managed appropriately and that 

the FBO will be able to repay daylight 

overdrafts, eligible FBOs under the 

streamlined procedure will be subject to 

initial and periodic reviews of liquidity 

plans that are analogous to the liquidity 

reviews undergone by U.S. 

institutions.93 If an eligible FBO 

requests capacity in excess of 100 

percent of worldwide capital times the 

self-assessed cap multiple, it would be 

subject to the general procedure. 

F. Special Situations 

Under the Board’s policy, certain 

institutions warrant special treatment 

primarily because of their charter types. 

As mentioned previously, an institution 

must have regular access to the discount 

window and be in sound financial 

condition in order to adopt a net debit 

cap greater than zero. Institutions that 

do not have regular access to the 

discount window include Edge and 

agreement corporations, bankers’ banks 

that are not subject to reserve 

requirements, limited-purpose trust 

companies, government-sponsored 

enterprises (GSEs), and certain 

international organizations.94

Institutions that have been assigned a 

zero cap by their Reserve Banks are also 

subject to special considerations under 

this policy based on the risks they pose. 

In developing its policy for these 

institutions, the Board has sought to 

balance the goal of reducing and 

managing risk in the payments system, 

including risk to the Federal Reserve, 

with that of minimizing the adverse 

effects on the payments operations of 

these institutions. 

Regular access to the Federal Reserve 

discount window generally is available 

to institutions that are subject to reserve 

requirements. If an institution that is not 

subject to reserve requirements and thus 

does not have regular discount-window 

access were to incur a daylight 

overdraft, the Federal Reserve might end 

up extending overnight credit to that 

institution if the daylight overdraft were 

not covered by the end of the business 

day. Such a credit extension would be 

contrary to the quid pro quo of reserves 

for regular discount-window access as 

reflected in the Federal Reserve Act and 

in Board regulations. Thus, institutions 

that do not have regular access to the 

discount window should not incur 

daylight overdrafts in their Federal 

Reserve accounts. 

Certain institutions are subject to a 

daylight-overdraft penalty fee levied 

against the average daily daylight 

overdraft incurred by the institution. 

These include Edge and agreement 

corporations, bankers’ banks that are not 

subject to reserve requirements, and 

limited-purpose trust companies. The 

annual rate used to determine the 

daylight-overdraft penalty fee is equal to 

the annual rate applicable to the 

daylight overdrafts of other institutions 

(50 basis points) plus 100 basis points 

multiplied by the fraction of a 24-hour 

day during which Fedwire is scheduled 

to operate (currently 21.5/24). The daily 

daylight-overdraft penalty rate is 

calculated by dividing the annual 

penalty rate by 360.95 The daylightoverdraft penalty rate applies to the 

institution’s average daily daylight 

overdraft in its Federal Reserve account. 

The daylight-overdraft penalty rate is 

charged in lieu of, not in addition to, the 

rate used to calculate daylight overdraft 

fees for institutions described in section 

II.F. 

Institutions that are subject to the 

daylight-overdraft penalty fee are not 

eligible for the $150 fee waiver and are 

subject to a minimum fee of $25 on any 

daylight overdrafts incurred in their 

Federal Reserve accounts.96 While such 

institutions may be required to post 

collateral (see sections II.F.), they are 

not eligible for the lower fee associated 

with collateralized daylight overdrafts. 

1. Edge and Agreement Corporations 97

Edge and agreement corporations 

should refrain from incurring daylight 

overdrafts in their Federal Reserve 

accounts. In the event that any daylight 

overdrafts occur, the Edge or agreement 

corporation must post collateral to cover 

the overdrafts. In addition to posting 

collateral, the Edge or agreement 

corporation would be subject to the 

daylight-overdraft penalty rate levied 

against the average daily daylight 

overdrafts incurred by the institution, as 

described above. 

This policy reflects the Board’s 

concerns that these institutions lack 

regular access to the discount window 

and that the parent company may be 

unable or unwilling to cover its 

subsidiary’s overdraft on a timely basis. 

The Board notes that the parent of an 

Edge or agreement corporation could 

fund its subsidiary during the day over 

Fedwire or the parent could substitute 

itself for its subsidiary on private 

systems. Such an approach by the 

parent could both reduce systemic risk 

exposure and permit the Edge or 

agreement corporation to continue to 


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98For the purposes of this policy, a bankers’ bank 

is a depository institution that is not required to 

maintain reserves under the Board’s Regulation D 

(12 CFR 204) because it is organized solely to do 

business with other financial institutions, is owned 

primarily by the financial institutions with which 

it does business, and does not do business with the 

general public. Such bankers’ banks also generally 

are not eligible for Federal Reserve Bank credit 

under the Board’s Regulation A (12 CFR 

201.2(c)(2)). 

99For the purposes of this policy, a limitedpurpose trust company is a trust company that is 

a member of the Federal Reserve System but that 

does not meet the definition of ‘‘depository 

institution’’ in section 19(b)(1)(A) of the Federal 

Reserve Act (12 U.S.C. 461(b)(1)(A)). 

100There are no changes in monitoring of exempt 

institutions: overdrafts above the exempt cap limit, 

regardless of whether such overdrafts are 

collateralized or uncollateralized, should no more 

than twice in two consecutive two-week reservemaintenance periods (the total of four weeks). 

101 Institutions that are monitored in real time 

must fund the total amount of their ACH credit 

originations in order for the transactions to be 

processed by the Federal Reserve, even if those 

transactions are processed one or two days before 

settlement. 

service its customers. Edge and 

agreement corporation subsidiaries of 

foreign banking organizations are 

treated in the same manner as their 

domestically owned counterparts. 

2. Bankers’ Banks 98

Bankers’ banks are exempt from 

reserve requirements and do not have 

regular access to the discount window. 

They do, however, have access to 

Federal Reserve payments services. 

Bankers’ banks should refrain from 

incurring daylight overdrafts and must 

post collateral to cover any overdrafts 

they do incur. In addition to posting 

collateral, a bankers’ bank would be 

subject to the daylight-overdraft penalty 

fee levied against the average daily 

daylight overdrafts incurred by the 

institution, as described above. 

The Board’s policy for bankers’ banks 

reflects the Reserve Banks’ need to 

protect themselves from potential losses 

resulting from daylight overdrafts 

incurred by bankers’ banks. The policy 

also considers the fact that some 

bankers’ banks do not incur the costs of 

maintaining reserves as do some other 

institutions and do not have regular 

access to the discount window. 

Bankers’ banks may voluntarily waive 

their exemption from reserve 

requirements, thus gaining access to the 

discount window. Such bankers’ banks 

are free to establish net debit caps and 

would be subject to the same policy as 

other institutions. The policy set out in 

this section applies only to those 

bankers’ banks that have not waived 

their exemption from reserve 

requirements. 

3. Limited-Purpose Trust Companies 99

The Federal Reserve Act permits the 

Board to grant Federal Reserve 

membership to limited-purpose trust 

companies subject to conditions the 

Board may prescribe pursuant to the 

Act. As a general matter, member 

limited-purpose trust companies do not 

accept reservable deposits and do not 

have regular discount-window access. 

Limited-purpose trust companies 

should refrain from incurring daylight 

overdrafts and must post collateral to 

cover any overdrafts they do incur. In 

addition to posting collateral, limitedpurpose trust companies would be 

subject to the same daylight-overdraft 

penalty rate as other institutions that do 

not have regular access to the discount 

window. 

4. Government-Sponsored Enterprises 

and International Organizations 

The Reserve Banks act as fiscal agents 

for certain GSEs and international 

organizations in accordance with federal 

statutes. These institutions generally 

have Federal Reserve accounts and issue 

securities over the Fedwire Securities 

Service. The securities of these 

institutions are not obligations of, or 

fully guaranteed as to principal and 

interest by, the United States. 

Furthermore, these institutions are not 

subject to reserve requirements and do 

not have regular access to the discount 

window. GSEs and international 

organizations should refrain from 

incurring daylight overdrafts and must 

post collateral to cover any daylight 

overdrafts they do incur. In addition to 

posting collateral, these institutions 

would be subject to the same daylightoverdraft penalty rate as other 

institutions that do not have regular 

access to the discount window. 

5. Problem Institutions 

For institutions that are in weak 

financial condition, the Reserve Banks 

will impose a zero cap. The Reserve 

Bank will also monitor the institution’s 

activity in real time and reject or delay 

certain transactions that would create an 

overdraft. Problem institutions should 

refrain from incurring daylight 

overdrafts and must post collateral to 

cover any daylight overdrafts they do 

incur. 

G. Monitoring 

1. Ex Post 

Under the Federal Reserve’s ex post 

monitoring procedures, an institution 

with a daylight overdraft in excess of its 

maximum daylight overdraft capacity or 

net debit cap may be contacted by its 

Reserve Bank. Overdrafts above the cap 

for institutions with de minimis, selfassessed and max caps may be treated 

differently, depending on whether the 

overdraft is collateralized.100 If the 

overdraft is fully collateralized, the 

Reserve Bank may consider the 

condition an overlimit situation and 

may waive counseling for two incidents 

of overlimit, fully collateralized 

overdrafts per two consecutive twoweek reserve-maintenance periods (the 

total of four weeks). If instances of 

overlimit, fully collateralized overdrafts 

are beyond the approved number of 

overlimit incidents or if any part of the 

overdraft is uncollateralized, the 

Reserve Bank will apply normal 

counseling procedures. 

Each Reserve Bank retains the right to 

protect its risk exposure from individual 

institutions by unilaterally reducing net 

debit caps, imposing (additional) 

collateralization or clearing-balance 

requirements, rejecting or delaying 

certain transactions as described below, 

or, in extreme cases, taking the 

institution off line or prohibiting it from 

using Fedwire. 

2. Real Time 

A Reserve Bank will, through the 

Account Balance Monitoring System, 

apply real-time monitoring to an 

individual institution’s position when 

the Reserve Bank believes that it faces 

excessive risk exposure, for example, 

from problem banks or institutions with 

chronic overdrafts in excess of what the 

Reserve Bank determines is prudent. In 

such a case, the Reserve Bank will 

control its risk exposure by monitoring 

the institution’s position in real time, 

rejecting or delaying certain transactions 

that would exceed the institution’s 

maximum daylight overdraft capacity or 

net debit cap, and taking other 

prudential actions, including requiring 

(additional) collateral.101

3. Multi-district Institutions 

Institutions, such as those 

maintaining merger-transition accounts 

and U.S. branches and agencies of a 

foreign bank, that access Fedwire 

through accounts in more than one 

Federal Reserve District are expected to 

manage their accounts so that the total 

daylight overdraft position across all 

accounts does not exceed their net debit 

caps. One Reserve Bank will act as the 

administrative Reserve Bank and will 

have overall risk-management 

responsibilities for institutions 

maintaining accounts in more than one 

Federal Reserve District. For domestic 

institutions that have branches in 

multiple Federal Reserve Districts, the 

administrative Reserve Bank generally 


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102 12 U.S.C. 3101–3108. 

103As in the case of Edge and agreement 

corporations and their branches, with the approval 

of the designated administrative Reserve Bank, a 

second Reserve Bank may assume the responsibility 

of managing and monitoring the net debit cap of 

particular foreign branch and agency families. This 

would often be the case when the payments activity 

and national administrative office of the foreign 

branch and agency family is located in one District, 

while the oversight responsibility under the 

International Banking Act is in another District. If 

a second Reserve Bank assumes management 

responsibility, monitoring data will be forwarded to 

the designated administrator for use in the 

supervisory process. 

1The credit and debit accounting entries 

associated with ACH credit transfers and ACH debit 

transfers are posted simultaneously at the 

appointed posting time. 

All times are eastern time. 

2See 71 FR 35679, June 21, 2006. 

3The term ‘‘depository institution,’’ as used in 

this notice, refers not only to institutions defined 

as depository institutions in 12 U.S.C. 461(b)(1)(A), 

but also to U.S. branches and agencies of foreign 

banking organizations, Edge and agreement 

corporations, trust companies, and bankers’ banks, 

unless the context indicates a different reading. 

will be the Reserve Bank where the head 

office of the bank is located. 

In the case of families of U.S. 

branches and agencies of the same 

foreign banking organization, the 

administrative Reserve Bank generally is 

the Reserve Bank that exercises the 

Federal Reserve’s oversight 

responsibilities under the International 

Banking Act.102 The administrative 

Reserve Bank, in consultation with the 

management of the foreign bank’s U.S. 

operations and with Reserve Banks in 

whose territory other U.S. agencies or 

branches of the same foreign bank are 

located, may determine that these 

agencies and branches will not be 

permitted to incur overdrafts in Federal 

Reserve accounts. Alternatively, the 

administrative Reserve Bank, after 

similar consultation, may allocate all or 

part of the foreign family’s net debit cap 

to the Federal Reserve accounts of 

agencies or branches that are located 

outside of the administrative Reserve 

Bank’s District; in this case, the Reserve 

Bank in whose Districts those agencies 

or branches are located will be 

responsible for administering all or part 

of the collateral requirement.103

H. Transfer-Size Limit on Book-Entry 

Securities [No change] 

By order of the Board of Governors of the 

Federal Reserve System, February 28, 2008. 

Jennifer J. Johnson, 

Secretary of the Board. 

[FR Doc. 08–971 Filed 3–6–08; 8:45 am] 

BILLING CODE 6210–01–P 

FEDERAL RESERVE SYSTEM 

[Docket No. OP–1310] 

Policy on Payments System Risk; 

Daylight Overdraft Posting Rules 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Policy statement; Request for 

comments. 

SUMMARY: Commercial and government 

automated clearinghouse (ACH) credit 

transfers processed by the Federal 

Reserve Banks’ (Reserve Banks) FedACH 

service are currently posted at 8:30 a.m., 

while commercial and government ACH 

debit transfers are posted at 11 a.m.1

The Board proposes to change the 

posting time for commercial and 

government ACH debit transfers that are 

processed by the Reserve Banks’

FedACH service to 8:30 a.m. to coincide 

with the posting time for commercial 

and government ACH credit transfers. In 

line with this change, the Board also 

intends, in consultation with the U.S. 

Treasury, to move the posting time for 

Treasury Tax and Loan (TT&L) 

investments associated with Electronic 

Federal Tax Payment System (EFTPS) 

ACH debit transfers to 8:30 a.m. to 

maintain the simultaneous posting of 

ACH transactions and related Treasury 

transactions. 

DATES: Comments must be received on 

or before June 4, 2008. 

ADDRESSES: You may submit comments, 

identified by Docket No. OP–1310 by 

any of the following methods: 

• Agency Web site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/general

info/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: http:// 

regs.comments@federalreserve.gov. 

Include the docket number in the 

subject line of the message. 

• Fax: (202) 452–3819 or (202) 452–

3102. 

• Mail: Address to Jennifer J. Johnson, 

Secretary, Board of Governors of the 

Federal Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments will be made 

available on the Board’s Web site at 

http://www.federalreserve.gov/general

info/foia/ProposedRegs.cfm as 

submitted, unless modified for technical 

reasons. Accordingly, comments will 

not be edited to remove any identifying 

or contact information. Public 

comments may also be viewed 

electronically or in paper in Room MP–

500 of the Board’s Martin Building (20th 

and C Streets, NW.) between 9 a.m. and 

5 p.m. on weekdays. 

FOR FURTHER INFORMATION CONTACT: 

Jeffrey Marquardt, Deputy Director 

(202–452–2360) or Susan Foley, 

Assistant Director (202–452–3596), 

Division of Reserve Bank Operations 

and Payment Systems, Board of 

Governors of the Federal Reserve 

System; for users of 

Telecommunications Device for the Deaf 

(‘‘TDD’’) only, contact (202) 263–4869. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The Board has been reviewing for 

several years long-term developments in 

intraday liquidity and risk management 

in financial markets and the payments 

system, including increased use of 

daylight overdrafts at the Reserve Banks 

and increased Fedwire funds transfers 

late in the day. On June 21, 2006, the 

Board published for public comment the 

Consultation Paper on Intraday 

Liquidity Management and the 

Payments System Risk Policy 

(consultation paper) that sought 

information from financial institutions 

and other interested parties on their 

experience in managing liquidity, 

credit, and operational risks related to 

Fedwire funds transfers, especially lateday transfers.2 The Board sought 

comment on possible changes in market 

practices, operations, and the Federal 

Reserve’s PSR policy that could reduce 

one or more of these risks. 

One commenter on the consultation 

paper suggested a change in the posting 

rules for ACH debit transfers to reduce 

depository institutions’ need for 

intraday liquidity from Reserve Banks.3

This institution proposed that ACH 

credit and debit transfers post 

simultaneously to institutions’ Federal 

Reserve accounts so that only the net 

amount of funds from daily ACH 

settlements would increase or decrease 

balances held in these accounts. The 

Reserve Banks’ Retail Payments Office, 

which has primary responsibility for the 

Reserve Banks’ FedACH service, has 

also indicated a preference for the 

simultaneous posting of ACH credit and 

debit transfers at 8:30 a.m., the same 

time as EPN, the other ACH operator. 

This change would remove competitive 

disparities between these systems or 

their participants arising from different 

settlement times for ACH debit 

transfers. 

In addition to proposing the change to 

the posting rules for ACH debit 

transfers, the Board also intends, in 

consultation with the U.S. Treasury, to 

move the posting of TT&L investments 


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