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Federal Reserve Bank
OF DALLAS
T O N Y J . SALVAGGIO
FIR S T V IC E PR E S ID E N T

March 28, 1994

DALLAS, TE X A S
7 5 2 6 5 -5 9 0 6

Notice 94-34
TO:

The Chief Operating Officer of
each financial institution in the
Eleventh Federal Reserve District
SUBJECT
Modification of the Payments
System Risk Policy
DETAILS

The Board of Governors of the Federal Reserve System has modified
its payments system risk policy by adopting a daylight overdraft penalty fee.
The penalty fee will be assessed on the average daily daylight overdrafts in
Federal Reserve accounts incurred by ban k e r s ’ banks that do not maintain
reserves, Edge and agreement corporations, and 1 imited-purpose trust compa­
nies. The rate for the daylight overdraft penalty fee is equal to the regular
daylight overdraft rate applicable to other institutions plus 100 basis
points, quoted on a 24-hour basis, for a 360-day year, and adjusted for the
length of the Fedwire operating day. The penalty fee should create an incen­
tive for institutions that do not have regular discount window access to avoid
incurring daylight overdrafts in Federal Reserve accounts.
The B o a r d ’s policy statement becomes effective April 14, 1994.
ATTACHMENT
A copy of the B o a r d ’s notice as it appears on pages 8977-81, Vol.
59, No. 37, of the Federal Register dated February 24, 1994, is attached.
MORE INFORMATION
For more information, please contact Donna Gonzales at (214)
922-5584 or James Smith at (214) 922-5585.
For additional copies of this
B a n k ’s notice, please contact the Public Affairs Department at (214) 922-5254.
Sincerely,

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

Federal Register / Vol. 59, No. 37 / Thursday, February 24, 1994 / Notices
FEDERAL RESERVE SYSTEM
[Docket No. R-0693]
Modification of the Payments System
Risk Policy; Bankers’ Banks, Edge
Corporations, and Limited-Purpose
Trust Companies
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: P o l i c y s t a t e m e n t .

The Board has determined to
assess a penalty fee on the average daily
daylight overdrafts in Federal Reserve
accounts incurred by bankers’ banks
that do not m aintain reserves, Edge and
agreement corporations, and limitedpurpose trust companies. The rate for
the daylight overdraft penalty fee is
equal to the regular daylight overdraft
rate applicable to other institutions plus
100 basis points, quoted on a 24-hour
basis, for a 360-day year, and adjusted
for the length of the Fedwire operating
day. The penalty fee should create an
incentive for institutions that do not
have regular discount window access to
avoid incurring daylight overdrafts in
Federal Reserve accounts.
DATES: Effective A pril 14,1994.

SUMMARY:

8977

institutions w ithout regular discount
window access to refrain from incurring
daylight overdrafts. This incentive will
help a Reserve Bank to avoid a situation
where it may be obliged to permit an
overnight overdraft or to extend
extraordinary discount window credit if
an institution is unable to cover a
daylight overdraft by the end of the
business day. In addition, should
daylight overdrafts be considered as
Federal Reserve extensions of credit, the
penalty fee for bankers’ banks that do
not maintain reserves would reflect the
quid pro quo policy of reserves for
discount window access embodied in
the Monetary Control Act of 1980.
B ack g ro u n d

Under the Board’s current payments
system risk policy, most depository
institutions may incur daylight
overdrafts in their Federal Reserve
accounts up to a maximum, or cap, that
is a m ultiple of their risk-based capital.
Effective April 14,1994, the Reserve
Banks will assess a fee of 24 basis points
(annual rate) on average daily daylight
overdrafts. After full phase-in, expected
in 1996, this fee w ill rise to 60 basis
points (annual rate).
If an institution fails to cover a
FOR FURTHER INFORMATION CONTACT:
daylight overdraft by the close of the
Oliver I. Ireland, Associate General
business day, it may either obtain a
Counsel (202/452-3625) or Stephanie
discount window loan (if it has access
Martin, Senior Attorney (202/452to the discount window) or carry the
3198), Legal Division; for the hearing
overdraft overnight (a practice that is
impaired only: Telecommunications
discouraged by the Federal Reserve).
Device for the Deaf, Dorothea Thompson The Reserve Banks charge a penalty fee
(202/452-3544).
on overnight overdrafts. Since 1981, the
SUPPLEMENTARY INFORMATION: The Board
overnight penalty rate has equalled the
higher of 10 percent or the federal funds
has modified its paym ents system risk
policy by adopting a daylight overdraft
rate plus 2 percent (annual rate). On
penalty fee. The penalty fee w ill be
February 16,1994, the Board approved
assessed on average daily daylight
a new overnight overdraft penalty rate
overdrafts in Federal Reserve accounts
equal to the federal funds rate plus 4
incurred by Edge and agreement
percent, w ith no floor. When an
corporations,' bankers’ b an k s2 that do
institution incurs an overnight
not m aintain reserves, and limitedoverdraft, it m ust make up for any
purpose trust companies. These
reserve or clearing account deficiency
institutions do not have regular
by holding make-up balances on another
discount w indow access.
night.
The Federal Reserve Act exempts
The Board anticipates that the penalty
bankers’ banks from reserve
fee w ill provide an incentive for
requirements,3 and Regulation A
*Edge corporations are organized under section
explicitly excludes bankers’ banks from
25A of the Federal Reserve Act (12 U.S.C. 611-631). regular discount w indow access.4
Agreement corporations have an agreement or
Nevertheless, the Board has permitted
undertaking with the Board under section 25 of the
bankers’ banks to have access to the
Federal Reserve Act (12 U.S.C 601-604a). For the'
discount w indow if they choose to
purposes of this docket, the term "Edge
corporation” includes both Edge and agreement
m aintain reserves voluntarily. Bankers’
corporations.
banks that m aintain reserves may
3 A bankers’ bank is a financial institution that is
establish a cap and incur daylight
not required to m aintain reserves under the Board’s
overdrafts under the payments system
Regulation D (12 CFR part 204) because it is
organized solely to do business with other financial
risk policy to the same extent and
institutions, is owned prim arily by the financial
subject to the same fees as depository
institutions w ith w hich it does business, and does
not do business with the general public. A bankers’
bank is not a depository institution as defined in
the Board’s Regulation A (12 CFR 201.2(a)).

’ 12 U.S.C 461(b)(9).
<12 CFR 201.2(a)(2).

8978

Federal Register / Vol. 59, No. 37 / Thursday, February 24, 1994 / Notices

institutions. To address the risks arising
from daylight overdrafts and to avoid
the extension of overnight credit to
institutions w ith no discount window
access, current policy provides that
bankers' banks that do not m aintain
reserves should refrain from incurring
daylight overdrafts. If such institutions
do incur daylight overdrafts, however,
they are required to post collateral to
cover the overdrafts.
Edge corporations are subject to
reserve requirements, but do not have
access to the discount window on the
same basis as depository institutions.
Instead, Edge corporations generally are
funded by their parent depository
institutions, which have discount
window access. Current policy permits
Edge corporations to establish a cap and
to incur overdrafts w ithin that cap,
provided that they post collateral to
cover the overdrafts. Edge corporations
also may incur book-entry securities
overdrafts above their cap, provided the
overdrafts are collateralized.
Limited-purpose trust companies may
become members of the Federal Reserve,
at the Board’s discretion, 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, do not have regular discount
w indow access, and may not incur
daylight overdrafts.
Previous Board Actions

collateralized.5 Reserve Banks will have
the ability to waive the penalty fee if, for
example, the overdraft resulted from a
Reserve Bank error.
The daylight penalty rate proposed in
1993 was equal to the overnight penalty
rate plus the federal funds rate (e.g.,
given a 10 percent overnight penalty
rate and a 3 percent federal funds rate,
the daylight penalty rate would be 13
percent), adjusted for the length of the
Fedwire operating day. The Board
proposed the addition of the federal
funds rate to make the daylight penalty
rate more comparable to the overnight
penalty rate. As noted above,
institutions are required to make up any
reserve or clearing account deficiency
resulting from an overnight overdraft,
thereby incurring a loss of interest
earnings on the make-up funds. Rather
than instituting a make-up requirement
for daylight overdrafts subject to the
penalty fee, the Board proposed that the
daylight overdraft penalty rate include a
factor to account for the cost of holding
make-up funds.
The Board also proposed to adjust the
m anner in which the penalty fee is
calculated to make it similar to the
calculation of the “regular” daylight
overdraft fee. The regular daylight
overdraft fee is quoted on a 24-hour
basis, for a 360-day year, and adjusted
for the length of the Fedwire operating
day. This adjustment maintains a
constant per-minute charge in the event
that Fedwire hours change. The Board
proposed that the daylight penalty rate
be quoted on a similar basis. Under the
1993 proposal, assuming an overnight
overdraft rate of 10 percent and a federal
funds rate of 3 percent, the annual 24hour daylight penalty rate would be
22.3 percent, adjusted to 9.3 percent for
a 10-hour Fedwire operating day.

In May 1990, the Board proposed to
levy a penalty fee, at a rate equal to the
overnight overdraft penalty rate, on the
maximum daily daylight overdrafts
incurred by bankers’ banks that do not
m aintain reserves and Edge corporations
(55 FR 22086, May 31,1990). In August
1993, the Board adopted a modified
version of the 1990 proposal, but sought
Daylight Overdraft Penalty Rate
further comment on the rate at w hich
Adopted by the Board'
the daylight overdraft penalty fee would
The Board believes that it is
be assessed (58 FR 44672, August 24,
appropriate to retain a relatively high
1993). The policy adopted by the Board
overnight penalty rate (i.e., greater than
in 1993 provides that the daylight
the federal funds rate) to provide a
overdraft penalty fee will be levied on
the daily average, rather than maximum, strong incentive for all depository
daylight overdraft of institutions that do institutions to avoid overnight
overdrafts. However, a daylight penalty
not have regular discount window
rate tied to the overnight rate would also
access. The Board also determined to
be relatively high, perhaps higher than
apply the daylight overdraft penalty fee
necessary to provide an incentive for
to limited-purpose trust companies as
institutions to avoid daylight overdrafts.
well as bankers’ banks that do not
Therefore, the daylight overdraft penalty
m aintain reserves and Edge
corporations. The Board retained the
5 As these institutions do not normally maintain
requirement that, in the event a bankers’
collateral pledged to the Federal Reserve on an
bank, Edge corporation, or limitedongoing basis, if a bankers’ bank, Edge corporation,
purpose trust company incurs a daylight or limited-purpose trust company incurs a daylight
overdraft, the Reserve Bank generally requests a
overdraft, the overdraft should be
pledge of collateral (that would be eligible collateral
for a discount window loan) for an appropriate
period.

rate adopted by the Board is tied to the
regular daylight overdraft rate, rather
then the overnight penalty rate.
The daylight overdraft penalty rate
adopted by the Board is equal to the
regular Federal Reserve daylight
overdraft rate plus 100 basis points. The
annual daylight penalty rate will equal
124 basis points as of April 14,1994,
rising to 160 basis points w hen the
regular daylight overdraft fee is fully
phased in. The daylight penalty rate,
like the regular daylight rate, will be
adjusted to take account of the length of
the Fedwire operating day, yielding a
rate of 52 basis points as of April 14,
1994 (given a 10-hour Fedwire day), and
rising to 67 basis points after full phasein of the regular daylight fee. There is
no deductible associated with the
daylight overdraft penalty fee. In
addition, the Board has set a minimum
fee of $25 for any two-week period in
w hich a penalty fee is assessed (i.e., any
fee greater than zero and less than $25
over a two-week period would be
rounded up to $25).
Summary of and Responses to
Comments on 1993 Proposal
The Board received 28 comments on
the proposed penalty fee calculation.
The comments,were distributed as
follows:
Type of commenter

No. of re­
sponses

Corporate credit u n io n ..................
Commercial bank ....... .................
Federal Reserve Bank .................
Credit union ...................................
Commercial bankers’ b a n k ...........
Trade association ..........................
Bank holding com pany.................
Edge corporation ..........................
Federal agency.............................

18
2
2
1
1
1
1
1
1

T o ta l....................................

28

The corporate credit union
commenters generally expressed similar
views regarding the proposal. They
opposed both the concept of the
daylight overdraft penalty and the size
of the proposed rate. These commenters
contended that the Board did not
present a legally sustainable case as to
why the same daylight overdraft rate
should not be imposed on all
institutions. They also asserted that the
Federal Reserve Act does not authorize
a penalty fee for corporate credit unions.
The corporate credit union
commenters, as well as the National
Credit Union Administration,
maintained that one of the purposes of
the proposed penalty fee appeared to be
to penalize those bankers’ banks that do
not maintain reserves. They argued that
it is unwarranted and contrary to the

Federal Register / Vol. 59, No. 37 / Thursday, February 24, 1994 / Notices
letter and spirit of the Monetary Control
Act (MCA) for the Board to attempt to
reduce the equality of treatment among
users of Federal Reserve services by
assessing corporate credit unions a
penalty fee for daylight overdrafts.
Five commenters, including a bank
trade association, a bank holding
com pany, and a commercial bankers’
bank, agreed that the MCA does not
require the Federal Reserve to treat
daylight credit as a service to which
depository institutions should have
equal access. Two of these commenters
stated that charging the same rate for all
daylight overdrafts would give an unfair
competitive advantage to those
institutions that do not maintain
reserves.
The legislative history of the MCA
indicates that Congress intended
bankers’ banks to have access to Federal
Reserve payment services despite the
fact that they do not m aintain reserves,
but also indicates that the access to
Federal Reserve services was opened up
to depository institutions in general
because they all were to be subject to
reserve requirements.6 The Board
believes that, when implementing a fee
for daylight overdrafts incurred through
use of Federal Reserve payments
services, it is reasonable to establish
different rates for institutions that
m aintain reserves and those that do not.
The language of the MCA supports this
distinction, by explicitly providing that
the Board may impose balances
“ sufficient for clearing purposes” as a
requirement for access to Federal
Reserve services. By including this
provision, Congress recognized that
certain institutions with access to
Federal Reserve services may not hold
reserves at the Reserve Bank and may be
subject to terms that w ould account for
that fact.
The corporate credit union
commenters also stated that the Board
has not shown how daylight overdrafts
incurred by corporate credit unions
differ from those incurred by
commercial banks and other depository
institutions. Many of these commenters
cited the Board’s 1989 overdraft survey,
w hich showed that corporate credit
unions incurred only 0.18 percent of the
total am ount of daylight overdrafts
incurred. The corporate credit unions,
as w ell as an Edge corporation, stated
that a penalty incentive is not necessary,
as these institutions rarely incur
daylight overdrafts. The commenters
also stated that corporate credit unions
‘ Colloquy between Mr. Wirth and Mr. Reuss, i2 6
Cong. Rec. H 2291, daily ed. March 27,1980. and
rem arks of Sen. Proxmire, 126 Cong. Rec. S 3167,
daily ed. March 27,1980.

do not incur overnight overdrafts, and
therefore there is no evidence that a
daylight penalty fee is necessary to
prevent overnight overdrafts.
The Board believes there is a
fundam ental difference between
overdrafts incurred by institutions that
have access to Federal Reserve credit
and those that do not. Even though
corporate credit union overdrafts
constitute only a small percentage of the
total daylight overdrafts in Federal
Reserve accounts, the Board believes
that these institutions should not
receive any daylight credit from the
Federal Reserve. On the other hand, the
Board allows depository institutions
with discount window access to incur
lim ited daylight overdrafts. The daylight
overdraft penalty fee reflects this
difference.
The corporate credit unions and the
National Credit Union Administration
argued that the proposed penalty fee is
excessive for the purposes of
discouraging daylight overdrafts. These
commenters also noted that the Board
has stated that even the regular daylight
overdraft fee of 60 basis points (adjusted
to 25 basis points given a 10-hour
Fedwire day) will provide an incentive
for depository institutions to reduce
daylight overdrafts. The corporate credit
union commenters, as well as a bank
trade association, also noted that the 10
percent floor in the current overnight
penalty rate, to which the proposed
daylight penalty rate was tied, yields an
anom alous result as the federal funds
rate declines. One commenter suggested
that a daylight penalty rate 100 basis
points above the federal funds rate
should provide more than sufficient
incentive for corporate credit unions to
avoid daylight overdrafts. Four
commenters, including a bank holding
com pany and a commercial bankers’
bank, supported the Board’s proposed
penalty fee calculation as equitable and
sufficient to deter daylight overdrafts.
As noted above, the daylight overdraft
penalty rate adopted by the Board will
not be linked to the overnight penalty
rate, but rather to the regular daylight
rate applicable to depository
institutions. The daylight penalty rate
w ill be com puted using the regular
daylight rate plus a penalty add-on of
100 basis points, w hich is more
proportional to the regular daylight rate.
This policy will allow the Board to
m aintain a relatively high overnight rate
that w ill provide a strong incentive to
avoid overnight overdrafts, w hile
m aintaining a relatively low daylight
penalty rate that will be less of a cost
burden on affected institutions yet high
enough to effect behavioral changes by
institutions to avoid daylight overdrafts

8979

altogether. The Board may consider
raising the penalty rate if such
behavioral changes do not occur. Also,
if an intraday market rate were to
develop in the future, the Board may
base the daylight penalty on that rate.
The daylight penalty rate will be
adjusted to account for the length of the
Fedwire operating day (multiplied by
10/24, given the current 10-hour
Fedwire day), as is the regular daylight
overdraft rate.
A bank trade association recognized
the Board’s intent to prevent institutions
that do not have regular discount
window access from obtaining credit
from the Federal Reserve, but stated that
a penalty-oriented approach could
result in risk-shifting from the Federal
Reserve to the private sector, rather than
reducing overall payment system risk.
The intent of the penalty fee is to
induce institutions to manage their
accounts so as to avoid overdrafts, this
reducing overall risk. The Board
recognizes, however, that some riskshifting would occur if institutions
affected by the penalty fee move their
payments business from the Federal
Reserve to the private sector.
Presumably, however, the risk would be
shifted to depository institutions that
have discount w indow access and thus
could obtain Federal Reserve credit to
cover daylight or overnight overdrafts in
their Federal Reserve accounts.
Several corporate credit union
com m enters stated that the proposed
penalty fee formula unfairly penalizes
corporate credit unions by not allowing
a deductible. The commenters noted
that the Board’s stated purpose of the
deductible for depository institutions
was to refrain from charging a large
num ber of institutions who present
small amount of risk and that this
reasoning should also apply to corporate
credit unions. One commenter
suggested that, as an alternative to a
deductible, the Board allow a one-hour
grace period before assessing a penalty
fee.
The Board established a deductible
for the regular daylight overdraft fee to
account for Reserve Bank error and
com puter downtime. The deductible
also provides a m inimal amount of free
intraday credit to depository
institutions. The Board does not believe
that it is appropriate to supply free
intraday credit to institutions that do
not have discount window access, and
thus has not provided a deductible or
grace period for the daylight penalty fee.
Reserve Banks will be able to waive
penalty fees that result from Reserve
Bank error or computer malfunction.
Two commenters suggested that no
penalty fee be imposed until the Federal

8980

Federal Register / Vol. 59, No. 37 / Thursday, February 24, 1994 / Notices

Reserve’s book-entry securities system is
redesigned to allow receiver control of
securities deliveries. These commenters
stated that the current system's design
forces unanticipated daylight overdrafts
and that the penalty fee punishes
certain institutions for a shortfall in the
Federal Reserve’s book-entry securities
transfer system.
Although institutions that receive
securities versus payment over Fedwire
do not have operational control over the
timing of the transaction, they often
know the approximate size and time of
incoming securities deliveries. The
Board believes it is appropriate to
require institutions without access to
Federal Reserve credit to manage their
account so as to avoid securities-related
overdrafts. The Federal Reserve is
currently studying new service
capabilities that would permit receivers
of securities to control the use of
securities-related intraday Federal
Reserve credit.
An Edge corporation requested that, if
a penalty fee is imposed, the Board
clarify that an Edge corporation could
pledge collateral to support regular
discount w indow borrowing similar to
the policy allowing bankers’ banks to
voluntarily m aintain reserves, thereby
allowing such Edge corporations to pay
only the regular daylight overdraft fee
rather than the penalty fee. This
commenter also suggested that the
Board should allow a parent bank to
guarantee the daylight overdraft
position of, or substitute itself for, an
Edge corporation, sim ilar to practice
under CHIPS rules. This practice w ould
allow a Reserve Bank to combine the
daylight position of an Edge corporation
and its p aren t
The Board believes that collateral and
pricing serve two related but separate
purposes. Although collateral limits
Reserve Bank risk, its purpose is to
make discount w indow loans to bookentry securities overdrafters feasible
during periods of operational difficulty.
The daylight overdraft penalty fee is
designed to create economic incentives
to eliminate the use of daylight credit by
institutions w ithout regular discount
w indow access. T heir lack of access to
the discount w indow suggests that Edge
corporations should be subject to the
same policy as bankers* banks that do
not maintain reserves. The policy
statement notes that the parent of an
Edge or agreement corporation could
fund its subsidiary during the day over
Fedwire and/or the parent could
substitute itself for its subsidiary on
private networks. Such ah approach by
the parent could both reduce systemic
risk exposure and perm it the Edge or

agreement corporation to continue to
service its customers.

headings “I. Federal Reserve Policy”,
“D. Net Debit Caps”, and “4. Special
Situations,” effective April 14,1994:
Competitive Im pact Analysis
4. Special Situations. Special risks are
The Board assesses the competitive
presented by the participation on
impact of changes that have a
Fedwire of Edge and agreement
substantial effect on payments system
corporations, bankers’ banks that are not
participants.7 Under this analysis, the
subject to reserve requirements, limitedBoard determines whether the change
purpose trust companies, and
would have a direct and material
institutions that have been assigned a
adverse effect on the ability of other
cap of zero by their Reserve Banks. Most
service providers to compete effectively
of these institutions lack regular
w ith the Federal Reserve in providing
discount window access. In developing
similar services.
its policy for these institutions, the
Many corporate credit unions have
Board has sought to balance the goal of
argued that the daylight overdraft
reducing and managing risk in the
penalty fee would put them at a
payments system, including risk to the
competitive disadvantage vis-a-vis other
Federal Reserve, with that of
payments system participants,
minimizing the adverse effects on the
particularly in book-entry security
payments operations of these
settlement and safekeeping services.
institutions.
These commenters asserted that
Regular access to the Federal Reserve
daylight overdraft penalty fees w ould
discount window generally is available
drive corporate credit unions out of the
to institutions that are subject to reserve
securities services and would force
requirements. If an institution that is not
credit unions to do business with other
subject to reserve requirements and thus
service providers. Such other service
does not have regular discount window
providers could be private institutions,
access were to incur a daylight
such as commercial banks, or credit
overdraft, the Federal Reserve may face
unions could choose to establish
the necessity of extending overnight
accounts directly w ith a Federal Reserve
credit to that institution if the daylight
Bank.
overdraft is not covered by the end of
The Board does not believe that its
the business day. This credit would be
policy adversely affects the ability of
corporate credit unions to compete with contrary to the quid pro quo of reserves
for discount w indow access established
the Reserve Banks in providing
in the Federal Reserve Act and Board
payments services. The policy places
regulations. In addition, the Board
controls on the use of the Federal
expects that assessing a fee for daylight
Reserve Banks’ funds and book-entry
overdrafts could lead to an intraday
transfer services, w hich are consistent
funds market, sim ilar to the current
with controls used in private clearing
and settlement systems. Corporate credit overnight funds market. As daylight
unions have the ability to establish caps credit begins to have significant value,
daylight overdrafts in accounts at the
and collateralize book-entry securities
Federal Reserve will begin to appear
overdrafts if they voluntarily maintain
more and more like overnight
reserves, as commercial banks are
extensions of credit by Reserve Banks.
required to do. By voluntarily
Thus, institutions that do not have
maintaining reserves, the corporate
regular access to the discount window
credit unions would avoid the penalty
should not incur either overnight
fees that, according to their comments,
overdrafts or daylight overdrafts in their
would cause their customer credit
Federal Reserve accounts.
unions to go to the Reserve Banks or
elsewhere for payments services. In
As set out below, Edge and agreement
addition, the penalty rate adopted by
corporations, bankers’ banks that are not
the Board is significantly lower than the subject to reserve requirements, and
rates proposed in 1990 and 1993 and
limited-purpose trust companies are
will result in a lower cost burden on
subject to a daylight overdraft penalty
corporate credit unions vis-a-vis their
fee levied against the average daily
competitors.
daylight overdraft incurred by the
institution. The annual rate for the
Policy Statement
daylight overdraft penalty fee is equal to
The Board has adopted the following
the annual rate applicable to the
to replace part (I)(D)(4) of its “ Federal
daylight overdrafts of other depository
Reserve System Policy Statement on
institutions (i.e., the rate set forth in
Payments System Risk’’ under the
section (I)(B)) plus 100 basis points,
adjusted to take account of the Fedwire
7These assessment procedures are described la
operating day (multiplied by the
the Board’s policy statem ent entitled ‘T h e Federal
fraction of the day Fedwire is scheduled
Reserve in the Payments System" (55 FR 11546,
March 29, 1990).
to operate). The daily daylight penalty

Federal Register / Vol. 59, No. 37 / Thursday, February 24, 1994 / Notices
rate is calculated by dividing the annual and do not have regular access to the
penalty rate by 360.
discount window . They do, however,
The penalty fee applies to the
have access to Federal Reserve
institution’s average daily daylight
payments services. The Board’s policy
overdraft in accounts at the Federal
provides that bankers’ banks should
Reserve. The average daily overdraft is
refrain from incurring overdrafts and
calculated by dividing the sum of the
post collateral to cover any overdrafts
negative Federal Reserve account
they do incur. In addition to posting
balances at the end of each minute of
collateral, a bankers’ bank would be
the scheduled Fedwire operating day
subject to a daylight overdraft penalty
(with positive balances set to zero) by
fee levied against the average daily
the total num ber of minutes in the
daylight overdrafts incurred by the
scheduled Fedwire operating day. The
institution, as described above.
penalty fee is charged in lieu of, not in
The Board’s policy for bankers’ banks
addition to, the daylight overdraft fee
reflects the need to protect Reserve
described in section (I)(B) and is
Banks from potential losses resulting
effective April 14, 1994.
from daylight overdrafts incurred by
Overnight overdrafts for these
bankers’ banks. The policy also reflects
institutions are treated similarly to
the fact that some bankers’ banks do not
overnight overdrafts of other depository
incur the costs of maintaining reserves
institutions.
as do other depository institutions and
a. Edge a nd agreement corporations.9 do not have regular access to the
Edge and agreement corporations
discount w indow and the similarity
should refrain from incurring daylight
between overdrafts and discount
overdrafts in their reserve or clearing
window credit.
accounts. In the event that any daylight
Bankers’ banks may voluntarily waive
overdrafts occur, the Edge or agreement
their exem ption from reserve
corporation m ust post collateral to cover
requirements, thus gaining access to the
the overdrafts. In addition to posting
discount window . Such bankers' banks
collateral, the Edge or agreement
would be free to establish caps and
corporation w ould be subject to a
would be subject to the same policy as
daylight overdraft penalty fee levied
other depository institutions. The policy
against the average daily daylight
set out in this section applies only to
overdrafts incurred by the institution, as
those bankers’ banks that have not
described above.
waived their exem ption from reserve
This policy reflects the lack of access
requirements.
of these institutions to the discount
c. Lim ited-purpose trust
w indow and the possibility that the
com panies.WA The Federal Reserve Act
parent of an Edge or agreement
permits the Board to grant Federal
corporation may be unable or unwilling
Reserve m em bership to limited-purpose
to cover its subsidiary’s overdraft on a
trust com panies subject to conditions
timely basis. The Board notes that the
the Board may prescribe pursuant to the
parent of an Edge or agreement
Act. As a general matter, member
corporation could fund its subsidiary
lknited-purpsse trust companies do not
during the day over Fedwire and/or the
accept reservable deposits, do not have
parent could substitute itself for its
subsidiary on private networks. Such an regular discount window access, and
may not incur daylight ©verdrafts.
approach by the parent could both
Limited-purpose trust companies are
reduce systemic risk exposure and
subject to the same daylight overdraft
permit the Edge or agreement
penalty fees as other institutions that do
corporation to continue to service its
not m aintain reserves and do not have
customers. Edge and agreement
regular discount window access.
corporation subsidiaries of foreign
banks are treated in the same manner as Limited-purpose trust companies
should refrain from incurring overdrafts
their domestically-owned counterparts.
and should post collateral to cover any
b. Bankers’ banks.10 Bankers’ banks
overdrafts they do incur. In addition to
are exempt from reserve requirements
posting collateral, a limited-purpose
trust company would be subject to a
’ These institutions are organized under section
25A of the Federal Reserve Act (12 U.S.C. 611-631)
daylight overdraft penalty fee levied
or have an agreement or undertaking with the Board against the average daily daylight
under section 25 of the Federal Reserve Act (12
U.S.C 601-604a).
10For the purposes of this policy statement, a
bankers' bank is a financial institution that is not
required to m aintain reserves under the Board's
Regulation D (12 CFR part 204) because it is
organized solely to do business with.other financial
institutions, is ow ned primarily by the financial
institutions with w hich it does business, and does
not do business w ith the general public and is not

a depository institution as defined in the Board's
Regulation A (12 GFR 201.2(a)).
•°* For the purposes of this policy statement, a
limited-purpose trust company is a trust company
that is a member of the Federal Reserve System but
that does not m eet the definition of "depository
institution” in section 19(b)(1)(A) of the Federal
Reserve Act (12 U.S.C. 461(b)(1)(A)).

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overdrafts incurred by the institution, as
described above.
d. Zero-cap depository institutions.
Some depository institutions have caps
of zero that are imposed by Reserve
Banks because of the institutions’
financially troubled status or failure to
comply with the Board’s payments
system risk policy or because the
institution itself requested a zero cap.
Regardless of w hether it has access to
the discount window , if a depository
institution on w hich a Reserve Bank has
imposed, or that has adopted, a zero cap
incurs a funds-transfer-related overdraft,
the Reserve Bank would counsel the
institution and may monitor the
institution’s activity in real-time and
reject or pend any Fedwire funds
transfer instruction that would cause an
overdraft. Because the timing of bookentry securities transfers are not fully
within the control of the receiving
depository institution, the Board will
allow depository institutions w ith caps
of zero that have access to the discount
window to continue to incur book-entry
overdrafts, but will require that such
overdrafts be collateralized even if they
are infrequent and modest.
By order of the Board of Governors of
the Federal Reserve System, February
17, 1994.
Jennifer J. Joh n son ,

Associate Secretary of the Board.
(FR Doc. 9 4 - 4 1 3 1 F iled 2 - 2 3 -9 4 ; 8:45 am |
BILUNG CODE 6210-01-P


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102