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Federal R eserve Bank

November 10, 1994

D| 52g|'J 9o6 S
A L : ExA
Notice 94-116


The Chief Operating Officer of
each financial institution in the
Eleventh Federal Reserve District

Modification to the Policy Statement
on Payment System Risk

The Board of Governors of the Federal Reserve System has approved a
modification to its Policy Statement on Payment System Risk regarding net debit caps.
Specifically, the Board has approved a doubling of the multiple associated with the de
minimis net debit cap from 20 to 40 percent of risk-based capital.
In addition, the Board approved administrative counseling flexibility for
institutions that continue to exceed their net debit caps due to the posting of nonFedwire transactions. Under this flexibility, the Reserve Banks will work with affected
institutions on ways to avoid daylight overdrafts, but will not subject these institutions to
routine counseling for daylight overdrafts.
The modification became effective October 13, 1994.

A copy of the Board’s notice (Federal Reserve System Docket No. R-0806) is

For additional copies, bankers and others are encouraged to use one o f the following toll-free numbers in contacting the Federal
R eserve Bank o f Dallas: Dallas O ffice (800) 333 -4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; H ouston
Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San A ntonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (





For more information, please contact Donna Gonzalez at (214) 922-5584 or
James Smith at (214) 922-5585. For additional copies of this Bank’s notice, please
contact the Public Affairs Department at (214) 922-5254.

[Docket No. R—0806]
Policy Statement on Payment System Risk

Board of Governors of the Federal Reserve System.




The Board of Governors of the Federal Reserve System

(Board) has approved a modification to its Policy Statement on
Payment System Risk regarding net debit caps.

Specifically, the

Board has approved that the multiple associated with the de
minimis net debit cap be doubled from 2 0 to 40 percent of riskbased capital.

In addition, the Board approved administrative

counseling flexibility for institutions that continue to exceed
their net debit caps due to the posting of non-Fedwire

Under this flexibility, the Reserve Banks will

work with affected institutions on means of avoiding daylight
overdrafts, but will not subject these institutions to routine
counseling for daylight overdrafts.

October 13, 1994.

FOR FURTHER INFORMATION CONTACT: Jeffrey C. Marquardt, Assistant
Director (202/452-2360), Paul Bettge, Manager (202/452-3174),
Division of Reserve Bank Operations and Payment Systems, Board of
Governors of the Federal Reserve System.

For the hearing

impaired only, Telecommunication Device for the Deaf (TDD),
Dorothea Thompson (202/452-3544).

The Board has established a Payment

System Risk Policy Statement pursuant to its authority under the
Federal Reserve Act. 12 U.S.C. 221 et sea.

In October 1993, the

Federal Reserve implemented a set of intraday posting rules for
debits and credits affecting depository institution accounts with
Reserve Banks.

The posting rules provide for the posting of non-

Fedwire transactions at specific times during the day, in
addition to the posting of Fedwire funds and securities transfers
as they occur throughout the day.

In contrast, according to the

posting rules that were in effect prior to last October, non-

Fedwire payments for each depository institution were netted and,
if a net credit resulted, the amount was posted to the
institution's Federal Reserve account as of the opening of
business and, if a net debit, as of the close of business.
Prior to implementation of the new posting rules, about
200 institutions, on average, exceeded their daylight overdraft
caps during any given two-week reserve maintenance period.
Immediately following implementation of the new posting rules,
this number increased to between 1200 and 1500 institutions per

In anticipation of this increase, the Board adopted a

"transition period" for routine administrative counseling in
order to provide institutions with a period of time to implement
changes to their Federal Reserve account management procedures in
order to reduce the incidence of daylight overdrafts in excess of
daylight overdraft caps.

Following nearly one year of

"transition," about 750 to 800 institutions per period still
typically exceed their caps.
The new posting rules were intended, in large part, to
support the assessment of daylight overdraft fees, which began on
April 14, 1994.

The posting rules were developed by the Board

over a three-year period and included two separate requests for
public comment.
In developing the new posting rules, four general
principles were established.

First, the intraday posting rules

were designed not to generate intraday float.

The old posting

rules typically created approximately $3 0 billion in intraday

Second, the new posting rules were to permit depository

institutions to anticipate precisely when transactions would be
posted to their account.

Under the old posting rules, an

institution would not know until after the close of business
whether the net of all non-Fedwire activity was a credit or a
debit and, accordingly, whether the netted amount would be posted
as of the opening or closing of business.

Third, the posting

rules were designed to be consistent with the legal rights and
responsibilities of depository institutions.

Under this

principle, check debits would not be posted to an institution's




account prior to presentment of the checks.

Finally, the new

posting rules were intended to be competitively neutral.


is, neither the Reserve Banks nor private sector providers of
correspondent banking services should be artificially advantaged
by the new posting rules.
Under these principles, the debit to an institution for
any payment is posted at the same time as the credit is posted to
the account of the counterparty to the transaction.


exception to this guideline is for check transactions where, by
virtue of the nature of check processing, it is not possible to
match debits and credits on a transaction-by-transaction basis
throughout the day.

In addition, because checks should not be

debited prior to presentment, a single time for all check debits
and credits would necessarily be later in the day than many
depository institutions believed appropriate.

Therefore, debits

for checks presented to depository institutions are posted on the
next clock hour at least one hour following presentment,
beginning at 11:00 a.m., Eastern Time.

Credits for check

deposits are either posted (1) at a single, float-weighted
posting time or (2) at multiple times throughout the day,
beginning at 11:00 a.m., Eastern Time, using a set of fractions
that are based upon Reserve Bank check collection experience.
For check credits, depository institutions are permitted to
select either option, based upon which alternative best meets
their needs. Currently, the earliest float-weighted posting time
(Option 1), which enables an institution to have full use of
check deposit credits, is 11:45 a.m. Eastern Time.
On average over a day, these check posting rules result
in a minimal amount of intraday check float.

At specific points

in time during the day, however, the check posting rules appear
to be giving rise to as much as $20 billion in "credit float,"
whereby the Reserve Banks have posted debits to depository
institution accounts prior to providing corresponding credits on
check transactions to other institutions.

The impact of this

float, and the measured daylight overdrafts it creates, appears




to be falling primarily on smaller depository institutions.
Under the old posting rules, smaller institutions
seldom incurred significant daylight overdrafts and, thus, were
able to make use of the "exempt from filing" or "de minimis"
daylight overdraft caps without incurring a significant number of
cap breaches.

Under the new posting rules, however, on average

over four recent reserve maintenance periods, 600 of the 775
total institutions with daylight overdrafts in excess of their
caps were institutions that had "exempt from filing" or "de
minimis" daylight overdraft caps.

An additional 159 institutions

with a zero net debit cap had cap breaches.
The "exempt from filing" cap permits an institution to
incur daylight overdrafts up to the lesser of $10 million or 20
percent of risk-based capital.

The exempt cap does not require

any action by the board of directors of the depository
institution or the filing of any documentation with its Reserve

As additional flexibility, an exempt-from-filing

institution may incur up to two daylight overdrafts in two
consecutive two-week reserve maintenance periods before it is in
violation of the Board's payments system risk (PSR) policy.1


order to incur higher daylight overdrafts, an institution may
file a resolution of its board of directors requesting a de
minimis cap, which permits daylight overdrafts up to 20 percent
of risk-based capital.

To be permitted even larger amounts of

intraday credit, up to 2.25 times risk-based capital on a single
day, the institution must undertake a self-assessment of
creditworthiness, intraday funds management and control, and
customer credit policies and controls to support a higher
daylight overdraft cap.
An institution that regularly exceeds its cap is
subject to progressively higher levels of administrative
1For institutions with other net debit cap categories, any
daylight overdraft that exceeds the net debit cap would be
subject to administrative counseling by the Reserve Banks.


counseling by its Reserve Bank.



Under current guidelines, a

depository institution that continues to exceed its daylight
overdraft cap ultimately may be assigned a zero cap and be placed
on the real-time monitor.

In this situation, a depository

institution will be prevented from originating Fedwire funds
transfers that would cause, or increase, a daylight overdraft.
The Board's policy on daylight overdraft caps is
intended to address intraday risk to the Federal Reserve arising
from daylight overdrafts.

However, most non-Fedwire activity

poses primarily interday, rather than intraday, risk.


counseling, including real-time monitoring, for non-Fedwirecaused daylight overdrafts may be of limited usefulness in
reducing these overdrafts.

In addition, most of the daylight

overdrafts caused by implementation of the new posting rules
would not result in the assessment of daylight overdraft charges,
owing to the deductible permitted in computing such charges.
Current alternatives available to a depository
institution to address the situation where it routinely exceeds
its daylight overdraft cap include:
assessment" cap,

(1) filing for a "self-

(2) shifting funding patterns or delaying the

origination of funds transfers,

(3) selecting the "fractional"

check posting option in order to begin receiving some check
credits earlier than the single, float-weighted posting time,


having check debits posted to the account of a correspondent
bank, or (5) transferring payment processing business to a
private correspondent bank.

It should be noted that filing for a

self-assessment cap is an alternative available only to
financially healthy institutions and presents an increased
administrative burden to these institutions.

In addition, many

of the small institutions adversely affected by the posting rules
have a limited amount of Fedwire funds transfer activity.


adjustments to such Fedwire activity may have a minimal impact on
such institutions' level of daylight overdrafts.

Similarly, a

correspondent bank may be unable to provide funding to
respondents earlier in the day without adversely affecting its




own daylight overdraft position.

The Board considered three alternatives to address

cap breaches attributable to the changes in the intraday posting
rules for non-Fedwire activity:

(1) increasing the size of the

multiples associated with daylight overdraft net debit caps,


adopting, on a permanent basis, counseling flexibility for
daylight overdrafts caused by non-Fedwire activity, or (3)
changing the posting rules.

Each of these alternatives is

discussed below.
The Board analyzed various scenarios to determine
whether the level of exempt-from-filing or de minimis cap
categories could be increased without materially increasing risk
to Reserve Banks.

An increase in the exempt-from-filing daylight

overdraft cap category would require no action on the part of a
depository institution, with a potentially substantial percentage
increase in intraday credit to be granted to that depository
institution by the Federal Reserve.

The Board believes that any

increase in the size of caps, without a self-assessment, should
be made in the de minimis cap, which requires the filing of a
board of directors' resolution.

This approach will ensure that

senior bank management and directors are aware of the potential
amount of credit that may be obtained by the depository
institution from the Federal Reserve during the day.
In studying increases in cap levels, the Board was
mindful of the existing structure of cap categories that require
a self-assessment.

For example, an "average" cap permits

daylight overdrafts, on average over a reserve maintenance
period, up to 75 percent of an institution's risk-based capital.
In order not to diminish the relevance of an "average" cap, which
can be obtained by an institution only after conducting a full
self-assessment, the Board believes the cap multiple for the de
minimis cap should not approach 75 percent.
At a level of 4 0 percent of risk-based capital,




however, between 85 and 90 percent of cap breaches by
institutions that currently have exempt or de minimis caps would
be eliminated, assuming certain exempt-from-filing institutions
file a board of directors' resolution adopting a de minimis cap.
Diminishing reductions in cap breaches by institutions with
exempt and de minimis caps are achieved with cap levels beyond 4 0
percent, with an associated lessening of the relative benefits of
a self-assessed cap.

Cap levels below 40 percent do not yield a

sufficient reduction in cap breaches to warrant any increase at
all in the level of the de minimis cap.
It should be noted that any increase in the size of net
debit caps, in addition to providing capacity to cover current
cap breaches caused by the posting rules, would also increase the
intraday capacity for daylight overdrafts resulting from
irrevocable Fedwire funds and book-entry securities transfers.
The Board believes that, for the most part, institutions with a
de minimis net debit cap have a relatively limited amount of
Fedwire activity and an increase in daylight overdraft capacity
will likely not increase significantly the risk exposure of the
Reserve Banks.

Moreover, Reserve Banks have special procedures

in place for dealing with risks posed by depository institutions
in poor or deteriorating financial condition.

The Board has,

therefore, approved an increase in the multiple associated with
the de minimis net debit cap from 2 0 percent to 4 0 percent of
risk-based capital.
As noted above, the Reserve Banks administratively
counsel depository institutions that exceed their caps.

For cap

categories other than the exempt-from-filing category, any
daylight overdrafts in excess of a depository institution's cap
are subject to counseling by the Reserve Banks.

For institutions

with an exempt cap, however, only when an institution incurs
three or more daylight overdrafts in excess of its cap within a
four-week period would it be subject to counseling.

The Board

reviewed this frequency measure to determine whether an increase




may be feasible.
By increasing the number of permissible daylight
overdrafts in excess of the exempt cap from two in two
consecutive two-week reserve maintenance periods to four in two
consecutive two-week reserve maintenance periods, 79 percent of
the institutions with exempt-from-filing caps that had cap
breaches would not be subject to counseling by their Reserve

A significant concern with increasing the permissible

occurrences of cap breaches, however, is that there is currently
no size limitation on the size of those cap breaches.

The Board

also believes that increases in the number of non-counselable
daylight overdrafts effectively increases the amount of intraday
credit that may be used by an institution.

Should the Federal

Reserve decide to increase the amount of intraday credit to be
extended to depository institutions, the Board believes it would
be preferable to identify such an increase clearly through an
increase in the size of a cap, rather than an increase in the
number of permissible excess daylight overdrafts.
Another approach to minimize the administrative burden
of counseling on both depository institutions and the Reserve
Banks is to exempt daylight overdrafts caused either by check
transactions or all non-Fedwire transactions from counseling.
The Board believes, however, that separate treatment under the
PSR policy of different types of payment transactions is not

For example, daylight overdrafts caused by book-entry

securities transfers and ACH transactions were initially excluded
from counseling under the PSR policy.

The Board decided in 1992

that all transactions should be treated alike for daylight
overdraft measurement purposes.

In addition, counseling

institutions for some daylight overdrafts and not for others may
lead to confusion, both within the Reserve Banks and at
depository institutions.
Nonetheless, some degree of counseling flexibility may
be appropriate.

As noted above, the Reserve Banks have had in

place since October 1993 a policy of administering daylight




overdraft counseling on a flexible basis, depending upon whether
cap breaches were attributable to the new posting rules.
Continued counseling flexibility appears to be desirable largely
in dealing with institutions that have a zero daylight overdraft
net debit cap as well as relatively small institutions that, by
the nature of their business, will continue to exceed a positive
net debit cap even after appropriate adjustments have been made.
These institutions may have few alternatives for eliminating nonFedwire daylight overdrafts.

The institutions that have zero

caps for reasons related to their financial condition are
typically already on the real-time monitor in reject or pend

In addition, in some cases, zero cap institutions are also

required by the Reserve Banks to prefund certain payments or
collateralize any daylight overdrafts.

Routinely counseling such

institutions for overdrafts caused by non-Fedwire transactions
lessens the credibility of the daylight overdraft counseling
program and appears to do little to lessen the actual risk to
Reserve Banks.

The Board has approved such administrative

counseling flexibility on an on-going basis.
Posting Procedures
Modifications to the intraday posting procedures would
be another way to address the frequency of cap breaches by small
depository institutions.

The Board believes any such

modifications should be carefully weighed.

The check posting

rules were adopted by the Board following a lengthy process
involving two requests for public comment and many discussions
with the banking industry, as noted above.

For example, the

principle of the elimination of intraday float for checks was
specifically addressed through public comment in 1989.

The new

posting rules have now been in place about one year and it is
possible that institutions may still be adapting to those rules.
In addition, changes to these rules after such a short period of
time may impose unanticipated costs associated with changing
computer programs on a large number of depository institutions.




Further changes to the check posting rules may also
lead to the creation of intraday float.

As an example, a scheme

whereby check credits are posted at 11:00 a.m. Eastern Time and
check debits continue to be posted on the clock hour at least one
hour following presentment would generate as much as $23 billion
in debit float at 11:00 a.m., and an average of $6 billion in
float over the course of the day.

However, even this radical a

change to the posting rules would not eliminate a significant
fraction of cap breaches caused by the implementation of the new
posting rules.

Many non-Fedwire-caused cap breaches would

continue due to the posting of ACH debit transactions, at
11:00 a.m. Eastern Time, and net settlement entries from private
clearing houses, as determined by the individual settlement

Many small depository institutions may continue to

encounter difficulties in funding these transactions on a timely
basis during the day.
Another possible change to the check posting rules
would be to shift the first check debiting time from 11:00 a.m.,
Eastern Time to 11:00 a.m., Local Time.

It was initially

believed that such an approach might make the fractional check
crediting option more feasible for many institutions in the
Central, Mountain, and Pacific time zones.

Upon further

analysis, however, the Board determined that because of the later
debiting times in western time zones, the corresponding crediting
times would shift later in the day as well, thereby lessening any
positive benefit of the delayed check debits.
A final alternative is to establish a new set of
posting rules for cap administration different from the posting
rules for the assessment of daylight overdraft fees.

The Board

does not believe such an approach would be desirable, as it would
likely lead to more, rather than less, of an administrative
burden on small institutions and could create a significant
amount of confusion in the banking industry about the focus of

the PSR initiative.
The Board has, therefore, not elected to make any
changes to the established intraday posting procedures at this
By order of the Board of Governors of the Federal
Reserve System, October 27, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-00000 Filed 00-00-94; 8:45am]

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