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Booklet:
Wholesale
Payment Systems Section: Appendix E: Federal Reserve Board Payment System Risk Policy: Daylight Overdrafts Subsection: |
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Similar to financial institutions offering retail payment services to customers, the Federal Reserve Banks are exposed to credit risk when they process payments for financial institutions holding reserve accounts. The Federal Reserve Banks guarantee payment finality for financial institutions using their systems for Fedwire Funds, NSS, and ACH credit originations. Due to this payment guarantee, the Federal Reserve Banks may incur losses when institutions fail with overdrafts in their accounts.
An
integral component of the Federal Reserve’s Payments System Risk
(PSR) policy controls and reduces the use of Federal Reserve Banks’
daylight overdrafts and the Federal Reserve Banks’ associated credit
risk.
The PSR policy addresses daylight overdrafts that occur in accounts at
Federal Reserve Banks as well as at financial institutions. A daylight
overdraft occurs when an institution’s Federal Reserve Bank account
is in a negative position during the business day.
To control daylight overdrafts, the PSR policy establishes limits, or net debit caps, on the amount of Federal Reserve Bank daylight credit that a depository institution may use during a single day and over a two-week reserve maintenance period. These limits are sufficiently flexible to reflect the overall financial condition and operational capacity of each institution using Federal Reserve Bank payment services. The policy also permits the Federal Reserve Banks to protect themselves from the risk of loss by unilaterally reducing net debit caps, imposing collateralization or clearing-balance requirements, rejecting or delaying certain transactions until sufficient balances exist, or prohibiting an institution from using Federal Reserve Bank payment services.
The PSR policy established daylight overdraft fees to provide a financial incentive for institutions to control their use of Federal Reserve Bank intraday credit and to recognize the risks inherent in the provision of intraday credit. Daylight overdraft fees induce financial institutions to make business decisions concerning the amount of Federal Reserve Bank intraday credit they are willing to use based on the cost of using that credit. The daylight overdraft measurement method, which incorporates a set of nearly real time transaction posting rules, also supports institutions in controlling their use of Federal Reserve Bank intraday credit.
The
Federal Reserve Banks use the Account Balance Monitoring System (ABMS)
to monitor financial institution accounts intraday. For a limited number
of institutions, the system is also used to prevent those institutions
from incurring daylight overdrafts in their Federal Reserve Bank accounts
beyond a certain threshold (often set to zero) for Fedwire Funds, NSS,
and ACH credit origination transactions. In this situation, credit ACH
transactions are required to be prefunded, including those settled on
behalf of any respondents. If there are insufficient funds available in
the account, the batch will reject and a notice will be sent to the ACH
sending point and to the settlement financial institution.