Payment System Risk

Federal Reserve Policy on Payment System Risk

In 1985, the Board of Governors of the Federal Reserve System adopted a policy to reduce the risks that large-dollar payment systems present to the Federal Reserve Banks, to the banking system, and to other sectors of the economy. An integral component of this policy--the Payment System Risk or PSR policy--is a program to control depository institutions' use of intraday Federal Reserve credit, commonly referred to as "daylight credit" or "daylight overdrafts." Over the years, the Board has modified the PSR policy several times to improve its effectiveness.

Initially, the PSR policy required 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 subsequent years, the Board expanded the PSR policy to address the control of risks in activities such as automated clearinghouse (ACH) transactions, book-entry securities transfers, offshore dollar clearing and netting, and certain private-sector securities clearing and settlement systems. The Board has also made a number of modifications to the original program, such as reductions in net debit cap levels and the creation of an exempt status for institutions that incur only minimal daylight overdrafts.

In 1992, the Board approved a significant policy change under which the Reserve Banks would begin to charge depository institutions fees for their use of Federal Reserve daylight credit. The Board planned to phase in the fee over a three-year period beginning in April 1994. The purpose of the fee was to induce behavior that would reduce risk and increase efficiency in the payment system. The Board also modified how it measures daylight overdrafts in depository institutions' Federal Reserve accounts. This measurement method incorporates specific account posting times for transactions that more closely reflect the processing times of transactions affecting an institution's intraday Federal Reserve account balance.

In 2001, the Board revised the PSR policy to permit certain depository institutions to obtain maximum daylight overdraft capacity above their net debit caps and to modify the net debit cap calculation for U.S. branches and agencies of foreign banks. In addition, the Board rescinded its interaffiliate transfer and Fedwire third-party access policies from the PSR policy because the risks presented by these arrangements are adequately addressed through the supervisory process.

In 2008, the Board adopted major revisions to part II of the PSR policy that are designed to improve intraday liquidity management and payment flows for the banking system, while also helping to mitigate the credit exposures to the Federal Reserve Banks from daylight overdrafts. The changes include a new approach that explicitly recognizes the role of the central bank in providing intraday balances to healthy depository institutions, a zero fee for collateralized daylight overdrafts, a 50 basis point (annual rate) charge for uncollateralized daylight overdrafts, and a biweekly daylight overdraft fee waiver of $150. In addition, the Board adopted changes to other elements of the PSR policy dealing with daylight overdrafts, including adjusting net debit caps, streamlining maximum daylight overdraft capacity procedures for certain 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. The changes will be implemented in fourth quarter 2010 or first quarter 2011. A specific date will be announced by the Board at least 90 days in advance.

The Board also approved for certain foreign banking organizations an interim policy change related to the calculation of the deductible amount from daylight overdraft fees and early implementation of the streamlined procedure for maximum daylight overdraft capacity. The interim policy changes and the early implementation of the streamlined maximum daylight overdraft capacity take effect on March 26, 2009.

Given the dynamic nature of the payment system, the Board must regularly monitor the effects of the PSR policy to ensure that it efficiently balances the costs and benefits associated with the provision of daylight credit.