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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 bankers’ 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 Board’s policy statement becomes effective April 14, 1994. ATTACHMENT A copy of the Board’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 Bank’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)). 8981 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
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