CUNA Regulatory Comment Call

October 3, 2001

Payment System Risk Policy Changes Affecting Intraday Credits



The Federal Reserve has issued proposed amendments to the Payments System Risk Policy (Policy) and requests comments on these changes by November 16, 2001. The potential amendments would:

Please send your comments to CUNA by November 2 for the proposal due on November 16. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at or to Assistant General Counsel Michelle Profit at; or mail them to Mary or Michelle c/o CUNA’s Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, D.C. 20005. For a copy of this proposal, which was published in the Federal Register on June 5, 2001, please press here


The policy was introduced in 1985 to reduce payment systems risks. The Reserve Banks risk losses when depository institutions use credit from their Federal Reserve Bank accounts. This credit is referred to as "daylight credit" or "daylight overdrafts." Reserve Banks face risk if depository institutions are unable to clear their daylight overdraft before the end of the day. As a result, the Policy required all depository institutions incurring daylight overdrafts in their Federal Reserve accounts as a result of Fedwire funds transfers to establish a maximum limit or net debit cap, on those overdrafts. In 1990, the Board established that a depository institution's funds and book-entry securities overdrafts would be combined for purposes of determining the institution's compliance with its cap.

Long Term Policy Exposures R-1111. The Fed has proposed policy changes to reduce the risk to the payments systems from allowing daylight overdrafts. By November 16, 2001, the Fed requests comments on these changes: (1) lowering single-day net debit cap levels to approximately the current two-week average cap levels and eliminating the two-week average cap; (2) implementing a two-tiered pricing regime for daylight overdrafts such that institutions pledging collateral to the Reserve Banks pay a lower fee on their collaterziled daylight overdrafts than on their uncollateralized daylight overdrafts; and (3) monitoring in real time all payments with settlement-day finality and rejecting those payments that would cause an institution to exceed its net debit cap.

The Reserve Banks set limits or net debit caps on the maximum amount of uncollateralized daylight credit that depository institutions may incur in their Reserve Bank accounts. These caps are calculated by applying a cap multiple from one of six cap classes to a depository institution's capital measure. A Reserve Bank may assign the exempt-from-filing cap without a depository institution taking any action. A depository institution may request a de minimis cap by submitting a board-of-directors resolution to its Reserve Bank, or the institution may request a self-assessed cap by completing a self-assessment. Reserve Banks may assign a zero cap in certain circumstances or a depository institution may request a zero cap to restrict its use of daylight overdrafts. The Fed implemented two cap multiples for depository institutions with self-assessed caps: one for the maximum allowable average on any day (single-day cap) and one for the maximum allowable average of the peak daily overdrafts in a two-week period (two-week average cap). The two-week cap is lower than the single-day cap, because the former is supposed to limit the overall level of overdrafts while allowing for daily payment fluctuations.

According to the Fed, about twenty percent of depository institutions would exceed their single-day net debit cap if it were reduced to the two-week average levels. For those institutions that would use collateral to boost their net debit cap, only about twelve percent would regularly exceed their debit caps.

The Fed is considering the benefits and drawbacks of implementing a two-tiered or differential pricing regime for daylight overdrafts, which would charge more for those overdrafts that do not have collateral. Under this proposal, depository institutions that have pledged collateral with the Fed would receive the collateralized price for intraday credit used up to the level of the collateral. In addition, while the interim policy statement does not permit depository institutions with exempt or de minimis caps to increase their daylight overdraft capacity by pledging collateral to the Reserve, these institutions would be allowed to pledge collateral in order to receive the lower daylight overdraft fee. In addition, the largest users of daylight credit, in general depository institutions with assets greater than $10 billion, pay more than 95 percent of aggregate daylight overdraft fees.

The Fed is also evaluating the benefits and drawbacks of universal real-time monitoring (URTM), which is defined as using the Reserve Banks' Account Balance Monitoring System (ABMS) to reject any payment with settlement-day finality that would cause any account holder's overdrafts to exceed its net debit cap. Payments with settlement-day finality include Fedwire funds and book-entry securities transfers, enhanced net settlement service (NSS) transactions, automated clearing house (ACH) credit transactions, and cash withdrawals. The Fed is considering URTM for payments with settlement-day finality because they represent greater credit risk to the Federal Reserve than payments without settlement-day finality. According to the Fed, approximately 97 percent of all account holders use less than 50 percent of their net debit caps for their average peak overdrafts. Even if net debit caps were reduced to the two-week average level, as described previously, most institutions should not experience rejected payments under URTM. Furthermore, allowing institutions to pledge collateral as is allowed in the interim policy statement should minimize payment disruptions.

In particular, monitoring ACH credit origination raises unique issues. The most important is that URTM could compromise ACH value dating. Value dating allows depository institutions to originate credit transactions one or two days in advance of the settlement date. Under current rules, only a subset of credit originators is required to prefund. Under a URTM environment, all ACH credit originators would have to prefund. If depository institutions that send files one or two days in advance, decide prefunding is costly, they may attempt to avoid prefunding by originating their ACH files in the early morning hours of settlement day instead of beforehand. Later originations could cause an originating depository institution to miss the close of the ACH processing cycle. Some institutions have suggested that the Fed allow use of collateral to substitute for prefunding. However, the Fed would have to alter its system to monitor the collateral in accounts over several days. The Fed will consider instituting URTM for all payments or only a subset of payments.

Questions on R-1111

  1. How would a reduction in the single-day debit cap affect the way institutions manage their Reserve Bank Accounts with respect to daylight overdrafts? Do institutions target a maximum level of daylight overdrafts that is at or below their two-week average caps? How much additional capacity between routine peak overdrafts and the current single-day net debit cap is prudent or necessary?

  2. Would lowering the single-day net debit caps for self-assessed institutions cause depository institutions to delay sending payments, potentially increasing overdrafts at other depository institutions?

  3. Should the Board consider a policy that gradually moves uncollateralized net debit caps to significantly lower levels (for example, to the levels associated with the de minimis net debit cap) and require all depository institutions to post collateral for overdrafts beyond the net debit cap?

  4. Do you support lowering the daily net debit cap to the two-week cap level? Why?

  5. What are the major drawbacks and benefits of a two-tiered pricing regime for collateralized and uncollateralized daylight overdrafts in Federal Reserve accounts? Would a two-tiered pricing policy cause institutions to pledge additional collateral to the Fed or would they primarily use collateral already pledged to a Reserve Bank? If collateralized daylight overdrafts were subject to a fee lower than he current 36-point basis-point fee, would institutions' daylight credit usage change from current levels?

  6. Do you support a two-tiered pricing regime? Please explain.

  7. Currently, Federal Reserve daylight credit is generally provided only to financially healthy depository institutions that have regular access to the discount window and are subject to supervisory examination. Does taking collateral from these depository institutions provide the Federal Reserve a sufficient reduction in risk to warrant a lower fee?

  8. What would be the benefits and drawbacks of URTM? Would URTM lead to significantly greater payment delays, or would there be little effect?

  9. If the Federal Reserve were to implement URTM, should it do so for all payments with settlement-day finality? If not, which payments should the Federal Reserve include under URTM? If the Federal Reserve implemented URTM for only Fedwire funds transfers and NSS transactions, would this action increase risk of large-dollar payments moving from Fedwire or NSS to the ACH? Would this provide the Federal Reserve with a competitive advantage in providing ACH services?

  10. What are the most significant benefits and drawbacks of implementing URTM for only Fedwire funds transfers and NSS transactions initially and continuing to evaluate moving other payments to URTM as the Federal Reserve and the industry gain more experience with URTM? What disruptions in the government-securities market, if any, could occur if the Federal Reserve were to implement URTM for Fedwire book-entry securities transfers? What disruptions in settlement arrangements, if any, could occur if the Federal Reserve were to implement URTM for NSS transactions?

  11. Do you support URTM? Why?

  12. Do you support the use of URTM to reject payments that would cause an institution to exceed its net debit cap? Why?

Eric Richard • General Counsel • (202) 508-6742 •
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 •
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 •
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 •