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Federal R eserve Bank
OF DALLAS
W IL L IA M

H. WALLACE

DALLAS, TEXAS 7 5 2 2 2

FIRST V IC E P R E S ID E N T
AND C H IE F O PER A TIN G O FFIC E R

June 26, 1990
Cir c u l a r 90-41

TO:

The Chief Executive Offi c e r of each
m e m b e r bank and others concerned in
the Eleventh Federal Reserve District
SUBJ E C T
Mo d i f i c a t i o n s to the Payments S y s t e m R i s k R e d u ction Prog r a m
DETAILS

As part of its payments system risk reduction program, the Federal
Reserve Board has adopted a policy governing d aylight o v e rdraft caps, including
m e asures of capital, for U.S.-ch a r t e r e d deposi t o r y institutions.
The Board also
has adopted a p o licy to reduce the risks to the Federal Reserve arising from
da ylight overd r a f t s associated with transfers of book-e n t r y securities on Fedwire.
The payments s y stem risk reduction policy also has been m o d i f i e d to allow certain
U.S. agencies and branches of a foreign bank to incur an u n c o l l a t e r a l i z e d daylight
overdraft cap equal to their cap m ultiple times a U.S. capital e q u i v a l e n c y equal to
10 percent of the b a n k ’s wo r l d w i d e capital, provided the foreign b a n k ’s home
country superv i s o r adheres to the Basle Capital Accord.
The B o a r d ’s m odified
policy will be e f f ective on Janu a r y 10, 1991.
In addition, the Board has requested
public comment on a proposed risk reduction policy prohi b i t i n g certain institutions
from incurring o verdrafts on Fedwire.
Comment is requested by Ju l y 31, 1990.
ATTACHMENTS
A copy of the B o a r d ’s notice appearing in the Federal Re g i s t e r is
attached.
M O R E INFORMATION
For m o r e information, please contact Donna M atthews at (214) 651-6646,
Vi r g i n i a Rodriguez at (214) 698-4228, or James Smith at (214) 651-6140.
For
additional copies of this circular, please contact the Pubic Affa i r s Depar t m e n t at
(214) 651-6289.
S i n cerely yours,

For a dditional copies of any c ircu lar p lease conta c t the Public A ffairs D ep artm en t a t (214) 6 51 -6 2 8 9 . Banks and others are
encouraged to use the follow ing incom ing W A TS numbers in conta c ting this Bank (800) 4 4 2 -7 1 4 0 (intrastate) and (800)
5 2 7 -9 2 0 0 (interstate).

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

22086

Federal Register / Vol. 55, No. 105 / Thursday, May 31, 1990 / Notices
book-entry overdrafts on Fedwire.
Under the proposed policy. Reserve
Banks would assess a penalty fee when
these or other institutions with imposed
zero caps incur inadvertent daylight or
overnight overdrafts on Fedwire.
DATES: Comments must be submitted on
or before July 31,1990.
ADDRESSES: Comments, which should
refer to Docket No. R-0693, may be
mailed to the Board of Governors of the
Federal Reserve System, 20th and C
Streets, NW, Washington, DC 20551,
Attention: Mr. William W. Wiles,
Secretary; or may be delivered to Room
B-2223 between 8:45 a.m. and 5 p.m. Al]
comments received at the above address
will be included in the public file and
may be inspected at Room B-1122
between 8:45 a.m. and 5:15 p.m.
FOR FURTHER INFORMATION CONTACT

FEDERAL RESERVE SYSTEM
[D ocket No. R-0693]
RIN 7100-AA76

Proposal To Modify the Payments
System Risk Reduction Program;
Bankers’ Banks, Edge Corporations,
and Zero-imposed Cap Institutions
AGENCY: Board o f Governors o f the
Federal Reserve System.
ACTION: Request for comment.
s u m m a ry : As part of its payments

system risk reduction program, the
Board is requesting comment on a
proposed risk reduction policy that
would prohibit bankers’ banks and Edge
corporations from incurring funds or

Edward C. Ettin, Deputy Director,
Division of Research and Statistics (202/
452-3368); Bruce J. Summers, Associate
Director (202/452-2231) or Florence M.
Young, Assistant Director (202/4523955), Division of Federal Reserve Bank
Operations; Oliver I. Ireland, Associate
General Counsel (202/452-3625) or
Stephanie Martin, Attorney (202/4523198), Legal Division; for the hearing
impaired only. Telecommunications
Device for the Deaf, Eamestine Hill or
Dorothea Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION: In April
1985, the Board adopted a policy to
reduce the risks that large-dollar
payments systems, including Fedwire,
presented to the Federal Reserve Banks,
to the depository institutions 1 using
them, to the banking system, and to
other sectors of the economy (50 FR
21120, May 22,1985). This policy, in
effect, established a maximum amount
of intraday funds overdrafts, or intraday
credit exposure, that depository
institutions are permitted to incur over
both Fedwire and private large-dollar
payments systems 2. The maximum, or
cap, is a multiple of a depository
institution’s capital 3 and is based on
the depository institution’s selfassessment of its own creditworthiness,
credit polices, and operational controls.
The guidelines for performing the selfassessment were established by the
Board, and the documentation
1 References to depository institutions include
trust companies.
2 Assuming settlement finality is adopted on the
Clearing House Interbank Paym ents System
(“CHIPS"), the cap will apply to Fedwire overdrafts
only as of January 10,1991 (see Docket #R-O068,
elsewhere in today's Federal Register).
3 The cap is currently based on adjusted primary
capital, but as January 10,1991, the cap will b e a
multiple of risk-based capital (see Docket #R-0668.
elsewhere in today's Federal Register).

supporting each depository institution’s
rating is reviewed by the institution's
primary supervisory agency examiners.
In July 1987, the Board adopted a
number of modifications to its daylight
overdraft policy, including a two-step, 25
percent reduction in the cross-system
net debit caps, thus reducing the
maximum daylight overdraft permitted
to an individual depository institution
(52 FR 29255, August 6,1987).
As published in Docket #R-0669,
elsewhere in today’s Federal Register,
the Board has adopted modifications to
its risk reduction program that bring
overdrafts resulting from book-entry
securities transactions within an
institution’s cap. Under the Board’s
book-entry policy, depository
institutions with positive caps that
frequently exceed their cap by material
amounts solely due to book-entry
securities activity must collateralize
their overdrafts attributable to bookentry securities activity. In addition,
financially healthy depository
institutions with positive caps may
choose to collateralize all or part of their
book-entry overdrafts, even if they do
not exceed their caps, and such secured
book-entry overdrafts shall not be
included with those funds or
uncollateralized book-entry overdrafts
measured against the cap. Moreover,
depository institutions that are
prohibited by Reserve Banks from
incurring overdrafts because of their risk
class (or for any other reason other than
lack of access to the discount window)
may incur book-entry overdrafts, but
must provide collateral to the Reserve
Bank sufficient to cover book-entry
overdrafts of any size of frequency.
Institutions that have not filed for a cap
that incur frequent and material
overdrafts due to book-entry
transactions will be requested by their
Reserve Bank to file for a cap. (Such
institutions are not permitted to incur
funds overdrafts, even with collateral.)
Those depository institutions that do not
have access to the discount window will
not be allowed to incur funds or bookentry overdrafts, regardless of collateral.
The Board is proposing a separate
policy for bankers’ banks and
corporations organized under section
25(a) of the Federal Reserve Act (12
U.S.C. 611-631) or having an agreement
or undertaking with the Board under
section 25 of the Federal Reserve Act (12
U.S.C. 601-604a) (“Edge corporations”).
Generally, these entities do not have
access to the discount window.
Bankers’ banks are statutorily exempt
from reserve requirements and are
excluded from discount window access,
although the Board has permitted such

Federal Register / Vol. 55, No. 105 / Thursday, May 31, 1990 / Notices
institutions to have access to the
discount window if they choose to hold
reserves. Some bankers’ banks,
however, are required by the Federal
Reserve to hold clearing balances as a
condition of obtaining Federal Reserve
payments services. In order to prevent
such an institution’s Fedwire activity
from resulting in an overnight overdraft,
the Federal Reserve has imposed a zero
cap on bankers’ banks.
Edge corporations, like bankers’
banks, do not have access to the
discount window, but current policy
permits Edge corporations to establish a
cap and to incur overdrafts within that
cap, provided that they post collateral.
Historically, Edge corporations and
bankers’ banks have not incurred bookentry overdrafts of any significant size
or frequency. During a four-week
sampling of data in August 1989, only
two bankers’ banks incurred book-entry
overdrafts, while only three Edge
corporations incurred either a funds or a
book-entry overdraft. No Edge
corporation exceeded its cap due to
book-entry overdrafts.
Nevertheless, their lack of access to
the discount window suggests that both
bankers’ banks and Edge corporations
should be made subject to the same
policy: prohibition of both funds and
book-entry overdrafts. The Board
realizes that inadvertent overdrafts,
particularly book-entry overdrafts, can
occur and may possibly become
overnight overdrafts. The Board believes
that its policy toward such institutions
should include a penalty charge for
inadvertent overdrafts that would
provide an incentive to bankers’ banks
and Edge corporations to avoid them.
In this regard, the Board proposes
that, should a bankers’ bank or an Edge
corporation incur an inadvertent
daylight overdrft due to either a funds or
a book-entry transaction, the Reserve
Bank would, absent unusual
circumstances, charge the institutions an
amount equal to the overnight overdraft
penalty fee, levied against the maximum
daylight overdraft level. If the daylight
overdraft is not fully repaid by the end
of the day, an additional amount equal
to the overnight overdraft penalty fee
would be levied against the overnight
overdraft and would be charged to the
bankers’ bank or Edge corporation. In
addition, Edge corporations would be
required to hold excess reserves on
subsequent days to make up for the
reserve shortfall, and, likewise, those
bankers’ banks that are required to hold
clearing balances with the Federal
Reserves would be required to hold
excess balances on subsequent days.
For those bankers' banks that do not

hold clearing balances, in addition to
the overnight overdraft penalty fee, the
bankers' bank would have to hold a
clearing balance on subsequent days to
offset the deficit to its zero balance
account. Reserve Banks would have the
ability to waive the daylight and
overnight charges, as well as the holding
of excess balances, as they do now for
overnight overdrafts if, for example, the
overdraft results from a Reserve Bank
error.
Under the Board's proposal, both
bankers’ banks and Edge corpora tions
would have to pre-fund their funds and
book-entry securities activity. This
proposal differs from the current policy,
which requires bankers’ banks to prefund their funds transfers but not their
receipt of book-entry securities transfers
against payment, and does not require
Edge corporations to pre-fund at all. The
Board is requesting public comment on
this change in policy and on the
proposals for penalty charges described
above.
The Board also requests comment on
whether certain other entities should be
subject to the same policy as bankers’
banks and Edge corporations. For
example, a depository institution may
have a zero cap imposed by a Reserve
Bank because the institution presented
the Reserve Banks with excessive risk
or because the institution has not
complied with the risk reduction
program. As noted above, under the
Board’s policy on book-entry overdrafts,
depository institutions with imposed
zero caps that have access to the
discount window would be able to incur
book-entry overdrafts if collateral w ere
posted. Book-entry overdrafts are
prohibited for institutions with imposed
zero cap s and no discount window
a ccess. Funds overdrafts are prohibited
for all institutions with imposed zero

22087

the discount window 4 and, as indicated
above, (2) the maximum inadvertent
daylight funds or book-entry overdraft
incurred by any institution with an
imposed zero cap and no discount
window access.5 As with Edge
corporations and bankers’ banks, if the
daylight overdraft of an institution with
an imposed zero cap is not fully
extinguished by the end of the day, the
Reserve Bank would charge an
additional amount equal to the overnight
overdraft penalty fee levied against the
overnight overdraft, and the institution
would also be required to hold excess
reserves on subsequent days to make up
for the reserve shortfall. The Reserve
Bank would be able to waive the
daylight and overnight charges, as well
as the balance requirements, at its
discretion.
Competitive Impact Analysis

Under its competitive equity policy,
the Board assesses the competitive
impact of changes that have a
substantial effect on payments system
participants.6 The Board believes these
modifications to its payments system
risk reduction program will have no
adverse effect on the ability of other
service providers to compete effectively
with the Federal Reserve Banks in
providing similar services. These
modifications place controls on the use
of the Federal Reserve Banks’ funds and
book-entry transfer services, which are
consistent with controls used in private
clearing and settlement systems.
By order of the Board of Governors of the
Federal Reserve System, May 24,1990.
William W. Wiles,

Secretary of the Board,
[FR Doc. 90-12555 Filed 5-30-99: 8:45 am]
BELLING CODE 6210-0T-M

[D ocket No. R-Q669]

caps.

The Board requests comment on
whether the proposed policy for
imposed-zero-cap institutions, including
trust companies with a zero cap, should
be consistent with the policy applied to
Edge corporations and bankers’ banks.
Applying penalty charges to imposedzero-cap institutions, even those with
access to the discount window, w ou ld
provide an incentive for those
institutions to avoid overdrafts, similar
to the incentive the Board proposes to
impose on Edge corporations and
bankers’ banks. Under such a policy.
Reserve Banks would charge the
overnight overdraft penalty fee for (1)
the maximum inadvertent daylight funds
overdraft incurred by any institution
with an imposed zero cap and access to

RfN 7100-AA76

Modifications to tha Payments System
Risk Reduction Program; Book-Entry
Securities Transfers
AGENCY: Board of Governors of the

Federal Reserve System.
ACTION: Policy statement.
SUMMARY: As part of its payments

system risk reduction program, the
4 These institutions could incur unlimited
collateralized book-entry overdrafts without fees.
5 Posted collateral would be irrelevant for the
fees charged to these institutions.
6 These assessm ent procedures are described in
the Board’s policy statem ent entitled “The Federal
Reserve in the Payments System” (55 FR 11648,
March 29,1990).

22088

Federal Register / Vol. 55, No. 105 / Thursday, May 31, 1990 / Notices

Board is adopting a policy to reduce the
risks to the Federal Reserve arising from
daylight overdrafts associated with
transfers of book-entry risk reduction
program are:
• Overdrafts arising out of wire
transfers of funds and book-entry
securities will be combined for purposes
of measuring the institution's daylight
overdraft against its cap.
• Depository institutions should not
exceed their daylight overdraft caps for
purposes of funds transfers, but
financially healthy institutions with
positive caps are permitted to exceed
their caps due to book-entry securities
activity.
• Depository institutions with positive
caps that frequently {more than three
occasions in two rolling two-week
intervals) exceed their caps by material
amounts (in excess of 10 percent or
more) solely due to book-entry securities
transactions must collateralize their
Fedwire overdrafts attributable to such
transactions.
• Financially healthy depository
institutions with positive caps may
choose to collateralize all or part of their
book-entry overdrafts, even if they do
not exceed their caps, and such secured
overdrafts shall be excluded from the
calculation of overdrafts subject to the
cap.
• Depository institutions should have
flexibility in determining the type of
collateral to pledge to secure book-entry
overdrafts.
• Depository institutions that are
assigned a cap of zero by Reserve Banks
because of their risks class {or for any
other reason other than lack of access to
the discount window) may incur bookentry overdrafts but must provide
collateral to the Reserve Bank sufficient
to cover book-entry overdrafts of any
size or frequency. Institutions that have
not filed for a cap that incur frequent
and material overdrafts due to bookentry transactions will be requested by
their Reserve Bank to file for a cap.
(Such institutions are not permitted to
incur funds overdrafts, even with
collateral.) Those depository institutions
that do not have access to the discount
window will not be allowed to incur
funds or book-entry overdrafts,
regardless of collateral.
EFFECTIVE DATE: January 10,1991.
FOR FURTHER INFORMATION CONTACT:

Edward C. Ettin, Deputy Director,
Division of Research and Statistics (202/
452-3368); Florence M. Young, Assistant
Director (202/452-3955) or Lisa Hoskins,
Senior Financial Services Analyst (202/
452-3437), Division of Federal Reserve
Bank Operations: Oliver I. Ireland,
Associate General Counsel (202/452-

3625) or Stephanie Martin, Attorney
(202/452-3198), Legal Division; for the
hearing impaired only:
Telecommunications Device for the
Deaf, Eamestine Hill or Dorothea
Thompson {202/452-3544).
SUPPLEMENTARY INFORMATION:

Background
The Board's payments system risk
reduction program establishes a
maximum amount of intraday overdrafts
that depository institutions are
permitted to incur over both Fedwire
and private large-dollar payments
systems,1The maximum, or cap, is a
multiple of a depository institution’s
capital “ and is based on a selfassessment of a depository institution's
creditworthiness, credit policies, and
operational controls. Since the initiation
of the policy in 1986, the daylight
overdrafts on Fedwire associated with
book-entry securities transfers have
been exempt from the cap limits,
pending development of procedures to
bring these intraday credit exposures
faced by Reserve Banks within the
ambit of the policy.
In June 1989, the Board requested
comment on proposed modifications to
its payments system risk reduction
program, including a proposal to include
book-entry related overdrafts in the
program (54 FR 26090, June 21,1989).
The Board’s proposals were designed to
protect the Reserve Banks, while
continuing to provide flexibility to
depository institutions engaged in
clearing U.S. Government securities and
other book-entry securities over
Fedwire. Specifically, the Board
proposed:
• To combine book-entry overdrafts
with funds overdrafts to create a
combined Fedwire overdraft within the
existing cap structure:
• To require depository institutions
that frequently exceed their Fedwire cap
by material amounts solely because of
book-entry securities transfers to
collateralize their total Fedwire
exposure;
• To use discount window collateral
not in use for that purpose held either by
the Reserve Bank or the depository
institution as the first preferred source
of collateral and other asset pools held
by the depository institution as the
1Assuming settlement finality is adopted on the
Clearing House Interbank Payments System
(“CHIPS”), the cap will apply to Fedwire overdrafts
only as of January 10,1991 (see Docket *K-0668.
elsewhere in today’ Federal Register).
s
2The cap is currently based on adjusted primary
capital, but as of January 10,1991, the cap will be a
multiple of risk based capital (see Docket #R-d668,
elsewhere in today's Federal Register).

second preferred source of collateral;
and
•
To use as a final source of
collateral, book-entry securities being
transferred, in the interim marked on the
depository institution’s own books, and,
in the long run, segregated and valued in
real time on the books of the Reserve
Bank.
Daylight overdrafts related to the
transfer of book-entry securities are
growing in size, yet are concentrated in
a few depository institutions. The
average daily amount of book-entry
overdrafts has grown from peak levels
of almost $60 billion in early 1988 to
almost $90 billion in 1990. The Board
believes that this growth in overdrafts
may be related to the growth in dealer
repurchase activity over the same
period. If this assumption is correct, it is
unlikely that steps being taken by the
industry, such as netting services by the
Government Securities Clearing
Corporation, will succeed in reducing
overdraft levels. Repurchase trading is
done for same-day delivery and return
early the next morning, and, in the near
term, technical difficulties prevent such
same-day trades from being netted by
the Government Securities Clearing
Corporation. Therefore, absent
reductions in repurchase trading, larger
peak book-entry overdrafts are likely to
continue.
Currently, ten depository institutions
account for 80 to 85 percent of total
book-entry overdrafts, with nearly 75
percent of that total attributable to the
three major book-entry clearing banks.
The Board believes, therefore, that a
policy requiring collateralization of
book-entry overdrafts for those
depository institutions that exceed their
caps due to book-entry overdrafts would
affect only a small number of depository
institutions engaged specifically in the
business of clearing book-entry
securities for primary dealers in those
securities. This assumption has been
borne out by two Federal Reserve
surveys in which data on overdrafts
were collected during a two-week
period in February 1988 and a four-week
period ending August 23,1989. These
surveys also support the Board’s
expectation that combining book-entry
overdrafts with funds overdrafts will not
measurably reduce the intraday
flexibility of the vast majority of
depository institutions with positive
caps.
Amount o f Overdraft
The Board has adopted its proposal
that a depository institution’s funds and
book-entry overdrafts be combined for
purposes of determining an institution's

Federal Register / Vol. 55, No. 105 / Thursday, May 31, 1990 / Notices
compliance with its cap. To determine
whether an institution exceeds its cap
due solely to book-entry securities
activity, Treasury and government
agency book-entry interest payments
will be credit to an institution’s funds
“account” as of the opening of the
business day. The net effect of new
Treasury issu es and Treasury and
government agency redemptions will be
credited or debited to the institution’s
book-entry “account” at the opening of
the book-entry day. New issues of
government agency securities will be
reflected in the book-entry “account” as
the securities are delivered over
Fedwire. Credits and debits from
transfers of book-entry securities will be
applied to the institution’s book-entry
“account." If an institution’s book-entry
“account” is in a net credit position,
these credits will be applied to the
institution’s funds "account." If the
book-entry “account” is in a net debit
position, a “book-entry overdraft" will
be counted as having occurred.
The Board received 83 comments on
the issue of combining funds and bookentry overdrafts for purposes of
measurement under the cap structure.
Eighteen commenters, including the
Board’s Large-Dollar Payments System
Advisory Group, supported the proposal.
These commenters generally believed
that the overdrafts arising from bookentry securities transfers are an
extension of credit and that all
extensions of credit by Reserve Banks
should be subject to controls.
Sixty-five commenters opposed
combining book-entry securities
transfers and funds transfers for
daylight overdraft measurement
purposes. Tweny-nine com m enters
indicated that the risks a sso c ia ted w ith
funds and book-entry securities
overdrafts are different and, therefore,
should be treated more flexibly than
proposed. Many of these commenters
argued that a funds transfer represents

the transfer of an asset, but a book-entry
securities transfer represents the
exchange of assets. Several commenters
supported a position taken by the Public
Securities Association ("PSA”) that the
risk presented by book-entry overdrafts
is qualitatively different from the risk
presented by funds overdrafts, as bookentry overdrafts are fully secured by the
underlying securities to which the
overdrafts relate. In a joint response,
four large clearing banks stated that the
risk represented by funds overdrafts is
the absolute dollar value of the resulting
overdraft, but the risk in book-entry
securities deliveries arises from either
interest rate volatility or from questions
regarding the security interest the

Federal Reserve Banks could obtain in
such securities. These clearing banks
argued that the Board's approach of
combining funds and book-entry
overdrafts creates serious mismatches
between real and perceived risk.
Another commercial bank also
supported this argument, stating that for
banks with moderate to heavy clearing
activities, the combination of book-entry
and Fedwire overdrafts would overstate
the Federal Reserve’s true level of risk.
The Board believes, however, that,
while the collateralized position of a
clearing bank vis-a-vis its customers
helps protect that bank against risk, the
bank’s collateralized position does not
necessarily translate into a higher
degree of protection for the Reserve
Bank. For the Reserve Bank, the risks
that intraday exposures may require
discount window funding are similar
regardless of the type of overdraft or the
collateral the clearing bank has taken.
Thus, measurement of the total
overdraft against the institution's cap is
appropriate.
Many commenters argued that
another significant distinction between
book-entry securities and funds
transfers is that receivers of book-entry
transfers have no control over the timing
of the debit to their account. Because of
the sender driven nature of the
securities transfer system, the
commenters stated that it is virtually
impossible for depository institutions to
control the level of their overdrafts.
The Board recognizes that the timing
of many book-entry overdrafts is
uncontrollable, but that intraday bookentry overdrafts, like funds overdrafts,
have the potential to become overnight
overdrafts. As discussed below, the
Board’s policy exempts collateralized
book-entry overdrafts from cap limits
because of the sender-driven nature of
the book-entry system and the Board's
sensitivity to the markets it supports.
The collateralization aspects of the
policy are designed to protect Reserve
Banks from the very large exposures
that can result from the book-entry
business.
Several commenters submitted a copy
of comments prepared by the
Association of Reserve City Bankers,
which stated that, in addition to not
having any control over the timing of the
debit, the availability of real-time
information on combined securities and
funds overdrafts is limited for smaller
banks, making it difficult for them to
manage a combined account position.
While the statement focuses on the
impact to smaller banks, opposition to
this aspect of the proposal was received
from all types and sizes of book-entry

22089

participants. Fifty commenters
expressed concern that the costs for
depository institutions to develop
procedures and computer systems to
monitor funds and book-entry overdrafts
simultaneously in a real-time
environment would be disproportionate
to the amount of risk reduction that
might be obtained. Many commenters
suggested that resources that would
otherwise be directed to improving and
expanding products and services would
likely be reallocated to internal
accounting enhancements. One bank
holding company stated that additional
cross-system monitoring, with the
corresponding internal competition for
cap resources, could force a bank to
address its own funding needs at the
expense of its customers' funds
movement needs.
Overall, concern was expressed that
the Board had underestimated the
number of depository institutions that
would be affected by this proposal,
particularly due to the need to perform
intraday tracking of both book-entry and
funds positions. Some commenters
suggested that the Board should
specifically target its proposal to those
depository institutions that are directly
responsible for the majority of bookentry overdrafts.
Based on its 1983 and 1989 surveys,
the Board believes that the policy it has
adopted for book-entry overdrafts is
narrowly tailored and will effect only a
relatively small number of depository
institutions. The surveys showed that
most institutions are rarely in danger of
exceeding their cap, even including
book-entry overdrafts. Therefore,
additional overdraft tracking should not
be necessary for most institutions.
Morever, those institutions that do
exceed their caps would be able to
collateralize their book-entry overdrafts,
as discussed below. The Board believes
that the policy adopted will allow
institutions to minimize internal
accounting systems changes. If clearing
banks prefer to pledge in-transit
securities to the Federal Reserve as
collateral for their book-entry
overdrafts, as they indicate they will, it
should not be difficult for institutions to
keep their book-entry business and
book-entry collateral operationally
separate from their funds business.
Should operational or other problems
necessitate an institution's borrowing
from the discount window to avoid an
overnight overdraft, overdrafts arising
from the funds business could be coverd
separately with available discount
window or other pools of collateral,
while book-entry overdrafts could be
secured with in-transit securities. On an

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Federal Register / Vol. 55, No. 105 / Thursday, May 31, 1990 / Notices

intraday basis, this approach could
result in some amount of over­
collateralization, but it should not be
operationally costly or cumbersome.
Twenty-nine commenters expressed
concern that the integration of bookentry overdrafts into the existing cap
structure may ultimately have an
adverse effect on daily Fedwire traffic
because the size of those overdrafts is
so substantial. Several commenters
asserted that the analysis did not
adequately recognize the
interdependencies of the various
securities markets (as well as the
participants in those markets) and,
therefore, did not address the problems
connected with differences in settlement
times. In addition, 13 commenters
suggested that the proposal created an
incentive for large banks to reject
incoming transfers arbitrarily to avoid
an overdraft.
The Board does not believe that
combining book-entry and funds
transfers under one cap will have
significant adverse effects on Fedwire
operations. Very few depository
institutions have high cap utilization
rates, even after the inclusion of bookentry overdrafts. For the handful that
do, their ability to incur collateralized
book-entry overdrafts in excess of cap,
as discussed below, should prevent
serious settlement timing delays in the
various securities markets. The Reserve
Banks will continue to monitor the bookentry transfer system and will take
action to discourage arbitrary rejections
by book-entry recipients and other
abuses of the system.
Collateralization Requirement
The Board has adopted a modified
version of its proposed policy on
collateralization. Financially healthy
depository institutions with positive
caps that frequently exceed their cap by
material amounts solely due to bookentry transfers will be required to
collateralize all of their book-entry
overdrafts, rather than their total funds
and book-entry overdrafts as initially
proposed. The Board has defined
“frequently” to mean more than three
occasions in two rolling two-week
intervals and “material amounts” to
mean in excess of 10 percent or more of
cap. For example, a depository
institution that meets the "frequent” and
“material” tests and has a $50 million
cap and a $70 million overdraft—$30
million due to funds transfers and $40
due to book-entry securities
transactions—will be required to
collateralize the entire $40 million of
book-entry overdrafts.
In addition, all financially healthy
depository institutions with positive

caps may choose to collateralize all or
part of their book-entry overdrafts, even
if they have not exceeeded their caps,
and such secured overdrafts shall not be
included with those overdrafts
measured against their caps. For
example, a financially healthy
depository institution with a $50 million
cap and a $30 million overdraft—$15
million due to funds transfers and $15
million due to book-entry securities
transfers—would ordinarily have excess
cap of $20 million. Such an institution
may increase its excess cap by $15
million by collateralizing all of its bookentry overdrafts (or may increase its
excess cap by less than $15 millin by
collateralizing some portion of its bookentry overdrafts). Such an institution
may not increase its cap of $50 million
by over-collateralizing its book-entry
overdrafts or by collateralizing any part
of its funds overdraft.
The Board received 75 comments on
its proposal requiring depository
institutions that frequently exceed their
Fedwire caps by material amounts
solely due to book-entry transactions to
collateralize their total Fedwire
exposure. Seventeen commenters
supported the proposal. The LargeDollar Payments System Advisory
Group agreed with the proposal and
suggested that it represented a positive
step in meeting some of the primary
goals of the payments system risk
reduction program, such as encouraging
the development to changes in market
practices designed to reduce risk and
providing adequate protection to the
individual Reserve Banks for the risk
posed by book-entry transactions.
Fifty-eight commenters strongly
opposed the requirement that the total
Fedwire exposure be fully collateralized
by depository institutions that exceed
their caps due to book-entry activity.
One-third of these commenters, the
clearing banks in particular, argued that
collateralization of total funds transfer
and book-entry daylight overdrafts
represents an unfair burden. The New
York Clearing House Association stated
that the cap represents the level of risk
that the Federal Reserve has judged
prudent for it to accept on an unsecured
basis during the day and that those
institutions whose business requires
them to exceed their caps regularly
should not be required to forego the
benefit of unsecured credit up to the
cap.
Although the clearing banks may have
sufficient collateral in a stable pool, PSA
and the clearing banks stated that the
total collateralization requirement
would place an unfair burden on the
funds transfer business of depository
institutions that choose to be clearers of

securities on a large scale vis-a-vis
those institutions that provide funds
clearing services only. These
commenters stated that securities
clearing banks would have to bear the
burden of collateralizing the total
overdraft, including both the book-entry
securities portion and the funds portion.
Many of these commenters suggested
that, if the Board pursued the
consolidated cap approach to
monitoring and controlling daylight
overdrafts, collateralization should be
imposed only on that portion of the
overdraft that is in excess of the cap.
The Board recognizes that some
commenters perceived that proposed
policy to be restrictive and
discriminatory, given the large
unsecured funds exposures permitted to
some depository institutions with large
caps, albeit because of their capital, that
would be unaffected by the proposed
book-entry program. Because of the
importance of maintaining a liquid and
efficient government securities market,
the Board wished to adopt a policy that
could generally be supported and
implemented by clearing banks.
Therefore, the Board has revised its
proposal and adopted a policy to require
collateralization of only the book-entry
portion of an institution’s overdraft.
Under the policy adopted by the
Board, financially healthy depository
institutions would be allowed to exceed
their cap with collateralized book-entry
overdrafts. The major risk addressed by
requiring collateral is that the institution
may experience an operational outrage.
Operational problems can cause bookentry overdrafts to increase
dramatically, but the incoming securities
that cause these exposures can be
pledged to Reserve Banks to cover the
overdraft. Operational problems related
to funds transfers, on the other hand,
usually prevent an institution from
sending payments. As a result, funds
transfer overdrafts tend to decline when
operational problems occur. Thus, a
Reserve Bank will be able to protect
itself fully against most operational risks
if it requires collateral only for bookentry overdrafts.
This policy assumes that, while a
book-entry operational problem is
occurring, the normal reserve position
management function of the clearing
bank remains unaffected and funds
overdrafts are extinguished as usual. In
the event this does not happen, the
Reserve Bank may experience
exposures that are not fully secured.
This problem will be addressed in an ad
hoc way, however, by allowing Reserve
Banks to increase the amount of
collateral held for discount window

Federal Register / Vol. 55, No. 105 / Thursday, May 31, 1990 / Notices
purposes over current, already sizeable,
amounts. In practice, institutions usually
keep sufficient collateral at Reserve
Banks to cover their funds overdrafts.
Given current levels of discount window
collateral, it is likely that Reserve Banks
would have the same amount of
collateral available when it is actually
needed under either the proposed or the
final policy.
Twenty-one commenters indicated
that the vagueness of the proposal’s
criteria, “frequently exceeds" and
“material amounts,” could result in
different treatment of depository
institutions across Federal Reserve
districts. Many commenters were
concerned that the proposal would be
administered differently by each of the
Reserve Banks resulting in an unlevel
playing field. The Large-Dollar
Payments System Advisory Group
strongly recommended that the Board
work with the Reserve Banks to develop
more specific guidelines as to the
patterns of overdrafts that would trigger
the collateralization requirements, and
more importantly, to ensure consistent
administration of the policy across all
depository institutions. Although the
likelihood of differences in application
among Reserve Banks is small, the
Board has set definitive standards for
these levels. The Board has defined
"materiality” as 10 percent or more in
excess of cap due to book-entry
overdrafts and has defined “frequent”
overdrafts to be those experienced on
more than three days in any rolling 20day period (two 2-week intervals).
Forty-one commenters indicated that
the costs associated with collateralizing
the combined overdraft would be
substantial and would have an adverse
impact on depository institutions’
profitability. Many depository
institutions would incur direct expenses
for the development of new collateral
monitoring systems as well as indirect
expenses related to acquiring and
pledging the required collateral.
Both custodian banks and clearing
banks were generally concerned that the
proposal would ultimately affect their
ability to raise funds. The custody banks
argued that they would have to acquire
new collateral or divert portfolio
securities (used for repurchase
agreements or as collateral for public
funds) to provide the necessary
collateral for daylight overdraft
purposes. The clearing banks, on the
other hand, were concerned about the
potential reaction in credit markets to
the use of major blocks of the clearing
banks’ own assets to collateralize a
single line of business (e.g., book-entry
securities transfers). Overall,

commenters argued that such costs
would be passed on to depository
institution customers and, ultimately, to
the Treasury. Approximately 28 percent
of these commenters believed that the
Board’s proposal would result in some
form of “tax” on Treasury securities.
The Board believes that the burden of
providing collateral is limited, as
collateral routinely available for
discount window purposes by the
affected institutions would more than
cover their funds transfer overdrafts as
measured under the current policy.
Thus, the cost impact of the new policy
will likely be low, given that a large part
of the book-entry portion of total
Fedwire overdrafts can be collateralized
by book-entry securities in transit.
Generally, the commenters supported
collateralizing those overdrafts that
result directly from book-entry transfers,
because this approach builds on existing
systems and business practices. As an
alternative proposal, several
commenters supported allowing
depository institutions, at their option,
either: (1) To combine both funds and
book-entry exposures under their
existing caps and agree to operate
within those caps, or, (2) to collateralize
the book-entry overdraft (no matter how
large or frequent), continue to exempt
this collateralized book-entry overdraft
from measuring compliance with the cap
and, as now, use the unsecured cap
overdraft amounts solely for their funds
businesses.
Under the policy adopted by the
Board, all depository institutions, not
just those with book-entry overdrafts
above their caps, may choose to
collateralize all or part of their bookentry overdrafts. Any collateralized
book-entry overdrafts would be
removed from consideration against the
cap, thereby leaving those institutions’
funds transfer flexibility unchanged.
This policy allows institutions to gain
cap headroom through collateralization
of book-entry overdrafts, even when
those institutions are not engaged in
large-scale book-entry clearing
businesses.
Collateralization Procedures
The Board has adopted a policy that
will give depository institutions
flexibility as to the specific type of
collateral that must be pledged to secure
book-entry overdrafts. The Reserve
Banks will not give preference, as
proposed in June 1989, to a particular
type of collateral, such as securities in
transit, discount window collateral, or
stable pools of collateral, unless such
preference is desired by the depository
institution; All collateral must be
acceptable to the Reserve Bank.

22091

Many commenters were critical of the
preferences indicated in the proposal as
to the type of collateral, and to the ways
in which intraday pledges of book-entry
securities would be made. The proposed
order of priority reflected both the
desire first to take collateral in which
interests can be perfected most easily,
and the fact that earlier Board bookentry proposals had been criticized
because of a stated unwillingness to use
stable pools of collateral.
Although several commenters
supported the proposal’s flexibility in
allowing the Reserve Banks to
customize each depository institution’s
collateral requirements, many more
were concerned about the possibility of
inconsistent treatment of depository
institutions across districts. One large
commercial bank stated that
customizing a mixed collateral program
on a case-by-case basis would be
difficult to implement without fostering
trade-offs between the business needs
of the depository institution and the
need to protect its Reserve Bank.
Several commenters expressed
reservations about using a stable pool of
collateral as the preferred method of
securing daylight overdrafts. The
custody banks were generally
concerned because most of their
portfolio securities are already pledged
for other purposes and remaining
securities activity is composed of a
substantial amount of custodial and
fiduciary transactions, which involve
non-pledgeable customer securities.
It was not the intent of the proposal to
be as rigid as it was interpreted by
commenters. It was the Board’s desire to
work with each depository institution to
determine the best mix of types of
collateral for that institution. The Board
has clarified its policy to indicate a
willingness to start the collateralization
identification process with book-entry
securities in transit, and to fill in with
other collateral, such as discount
window collateral and other stable
pools, where in-transit collateral is not
adequate.
Of the 49 commenters that discussed
the pledge of book-entry securities in­
transit, 39 supported the use of incoming
book-entry securities as collateral. Few
of these commenters, however, agreed
with the Board's interim procedures for
marking book-entry securities collateral
on the depository institution’s own
books. Commenters stated that the
proposal did not identify the types of
records, the frequency, or the level of
detail to be kept by the depository
institution.
PSA argued that the clearing banks
already have established control

22092

Federal Register / Vol. 55, No. 105 / Thursday, May 31, 1990 / Notices

mechanisms to minimize the risk
exposure to themselves arising from
book-entry overdrafts and to
collateralize the repayment of advances.
The Board's proposal would, in effect,
superimpose another collateral system
at the clearing bank level. To avoid this
“duplicative" effort, PSA and the
clearing banks suggested a system under
which the Reserve Bank would take an
assignment of the clearing bank’s
secured extension of credit to each
dealer. The “additional layer of
controls" presented in the proposal was
of concern to most of the primary
dealers because of the potential that one
dealer-customer’s securities might be
used as collateral for an overdraft
caused by another customer (“horizontal
risk") or as a result of the clearing
bank’s own activities (“vertical risk”).
Under the system suggested by PSA,
however, the Reserve Bank would not
have a better position than the clearing
bank vis-a-vis dealer/customer
securities delivered against payment.
The Reserve Bank’s interest in the
dealer’s proprietary securities or fullypaid customer securities would be
limited to the amount of clearing credit
extended by the clearing bank.
Moreover, if there were some defect in
the clearing bank's security interest or
the dealer or its customer had some
defense against the clearing bank, that
defect or defense could be raised
against the Reserve Bank.
The Board believes this approach has
the potential to impose substantial risk
on a Reserve Bank. That risk could be
reduced only by intrusion into the
clearing bank-dealer/customer
relationship. The Board also believes
that there are steps, such as agreeing to
use collateral sources other than in­
transit securities as a cushion against
cross-collateralization, that could be
taken to reduce risk of crosscollateralization to dealers.
Twenty-three commenters
representing a variety of book-entry
participants were concerned about the
legal obstacles involved with pledging
certain customer-owned securities.
Although many commenters suggested
that the underlying securities might be
the most appropriate form of collateral
for book-entry overdrafts, it was clearly
recognized that the development of
systems capabilities to segregate
customer securities received but not yet
paid for will take a long time.
Furthermore, roughly 15 percent of all
commenters suggested that the Board
encourage the implementation of
Treasury's TRADES regulations, which
would provide the Reserve Banks with a

“super lien" on book-entry securities in
transit.
Under the policy adopted by the
Board, securities in transit that are being
pledged to Reserve Banks to
collateralize depository institution
overdrafts are, in the interim, to be
marked on the books of the depository
institution. The Federal Reserve is
working with the major clearing banks
and dealers, the Treasury, and the
Public Securities Association in
formulating a pledge agreement covering
securities in transit that will address the
concerns raised by the commenters
without imposing substantial risk on the
Reserve Banks or intruding into the
relationships between clearing banks,
dealers, and their customers.
The in-transit pledge on the
institution’s own books is an interim
step until better automation capabilities
are available to allow such pledges to
be recorded on Reserve Bank books.
The Federal Reserve is currently
studying alternatives to deal with bookentry risk on an operational basis, and
plans to implement a new system by the
mid-nineties.
Other Book-Entry Issues
Currently, there are many depository
institutions with small (de minimis)
caps, zero caps imposed by Reserve
Banks because of the institution’s
financially troubled status or because of
Board policy, zero caps adopted at the
request of the institution, or no cap as a
result of not filing for a cap. Under the
old policy, none of these institutions
have had a prohibition or limit on bookentry overdrafts, but, under the newlyadopted policy, about 125 of them would
exceed their zero or small caps, wholly
or in part, due to book-entry overdrafts
on at least one day.
Because the timing of book-entry
overdrafts and, hence, their size, are
beyond the control of the depository
institution incurring the overdraft, and
given the current policy that requires
collateral from weak depository
institutions, the Board has developed a
separate policy for those institutions
currently prohibitied from funds
overdrafts or restricted to small cap
levels. The Board will allow those
institutions with zero caps that have
access to the discount window to
continue to incur book-entry overdrafts,
but will require collateralization even if
such overdrafts are infrequent and
modest. (The Board has requested
comment on penalty fees for inadvertent
overdrafts incurred by institutions with
imposed zero caps. See Docket #R-0693,
elsewhere in today's Federal Register.)
Institutions that have not filed for a cap
that incur frequent and material

overdrafts due to book-entry
transactions will be requested by their
Reserve Bank to file for a cap. (Such
institutions are not permitted to incur
funds overdrafts, even with collateral.)
Those depository institutions that do not
have access to the discount window will
not be allowed to incur funds or bookentry overdrafts, regardless of collateral.
Competitive Impact Analysis

Under its competitive equity policy,
the Board assesses the competitive
impact of changes that have a
substantial effect on payments system
participants.3 The Board believes these
modifications to its payments system
risk reduction program will have no
adverse effect on the ability of other
service providers to compete effectively
with the Federal Reserve Banks in
providing similar services. These
modifications place controls on the use
of the Federal Reserve Banks’ funds and
book-entry transfer services that are
consistent with controls used in private
clearing and settlement systems, and, if
anything, would have a positive impact
on competitors in these services.
By order of the Board of Governors of the
Federal Reserve System, May 24,1990.
William W. Wiles,

Secretary o f the Board.
[FR Doc. 90-12553 Filed 5-30-90; 8:45 am]
BILLING CODE 6210-01-M

[D ocket No. R-0668]
RIN 7100-AA76

Modifications to the Payments System
Risk Reduction Program; Caps and
Measures of Capital for U.S. Chartered
Depository Institutions
AGENCY: Board of Governors of the
Federal Reserve System.
a c t i o n : Policy statement.
SUMMARY: As part o f its payments

system risk reduction program, the
Board is adopting a policy governing
daylight overdraft caps, including
measures of capital, for U.S. chartered
depository institutions. Specifically, the
policy will:
• For the purpose of calculating
maximum permissible daylight
overdrafts, replace “adjusted primary
capital” with “qualifying" or similar
capital measures that include those
capital instruments that satisfy riskbased capital standards;
3 These assessm ent procedures are described in
the Board's policy statem ent entitled “The Federal
Reserve in the Payments System" (55 FR 11648,
March 29,1990).

Federal Register / Vol. 55, No. 105 / Thursday, May 31, 1990 / Notices
• Eliminate Clearing House Interbank
Payments System (“CHIPS”) net debits
from the cross-system cap, provided that
implementation of settlement finality
has been adopted by CHIPS;
• Excuse financially healthy U.S.
chartered depository instutitions that
rarely incur Fedwire overdrafts in
excess of the lessor of $10 million or 20
percent of their capital from filing
board-of-directors’ resolutions or selfassessements with their Reserve Banks;
and
• Create a revised de minimis cap
category to permit U.S. chartered
depository institutions a daily cap equal
to 20 percent of capital with a board-ofdirectors’ resolution but no selfassessment.
EFFECTIVE d a t e : January 10,1991.
FOR FURTHER INFORMATION CONTACT:

Edward C. Ettin, Deputy Director,
Division of Research and Statistics (202/
452-3368); Bruce J. Summers, Associate
Director (202/452-2231) or Florence M.
Young, Assistant Director (202/4523955), Division of Federal Reserve Bank
Operations; Oliver I. Ireland, Associate
General Counsel (202/452-3625) or
Stephanie Martin, Attorney (202/4523198), Legal Division; for the hearing
impaired only. Telecomunications
Device for the Deaf, Eamestine Hill or
Dorothea Thompson (202/452-3544).
SUPPLEMENTAY INFORMATION:

Background.
In April 1985, the Board adopted a
policy to reduce the risks that largedollar payments systems, including
Fedwire, present to the Federal Reserve,
to the depository institutions using them,
to the banking system, and to other
sectors of the economy (52 FR 21120,
May 22,1985). This policy in effect,
established a maximum amount of
intraday funds overdrafts, or intraday
credit exposure, that depository
institutions are permitted to incur over
both Fedwire and private large-dollar
payments systems. The maximum, or
cap, is a multiple of a depository
institution’s adjusted primary capital
and is based on the depository
institution's self-assessment of its own
creditworthiness, credit policies, and
operational controls. The guidelines for
performing the self-assessment were
established by the Board, and the
documentation supporting each
depository institution’s rating is
reviewed by the institution's primary
supervisory agency examiners. In July
1987, the Board adopted a number of
modifications to its daylight overdraft
policy, including a two-step, 25 percent
reduction in the cross-system net debit
caps, thus reducing the maximum

daylight exposure that an individual
depository institution could incur (52 FR
29255, August 6,1987).
In June 1989, the Board requested
comment on further modifications to its
payments system risk reduction program
(54 FR 26094, June 21,1989). The Board
proposed to; (i) Establish a program for
pricing the daily average value of all
Fedwire ovedrafts in excess of a
deductible, (ii) revise the definition and
measurement of daylight overdrafts to
facilitate pricing, (iii) exempt from filing
for caps those depository institutions
with relatively small overdrafts, (iv) use
risk-based capital as the factor to which
cap multiples would be applied, and (v)
exclude from the measurement of crosssystem net debit caps net debits on
CHIPS after CHIPS implements
settlement finality. As described below,
the Board has adopted policies,
essentially as proposed, regarding caps,
capital, and CHIPS net debits for
domestically-chartered depository
institutions. The Board expects to take
action on pricing and overdraft
measurement in the near future.
Although the Board originally
proposed that changes regarding CHIPS
net debits and caps would be
conditional on the changes in overdraft
measurement, the Board has adopted
these changes independently. The
CHIPS net debits and cap proposals
were generally supported by
commenters, ease the burden on
depository institutions, and cause only
limited increase in Reserve Bank or
systemic risk.
In related dockets, the Board's June
1989 proposals included modification to
its risk reduction policies concerning
book-entry securities (54 FR 26090, June
21,1989) and branches and agencies of
foreign banks (54 FR 26108, June 21,
1989). The final versions of these
policies, as well as a request for
comment concerning the overdraft
policy applicable to bankers’ banks and
Edge corporations, are discussed
elsewhere in today’s Federal Register.
Capital
The Board has adopted its proposal to
replace, for the purpose of calculating
maximum permissible daylight
overdrafts, “adjusted primary capital”
with “qualifying” or similar capital
measures that include those capital
instruments tht can be used to satisfy
risk-based capital standards. Depository
institutions that choose to access
Fedwire through multiple accounts will
continue to be required to allocate their
capital for daylight overdraft purposes
to each Reserve Bank at which they
incur overdrafts, and one Reserve Bank
will continue to have overall risk-

22093

management responsibilities. (Capital
for foreign banks is discussed in Docket
No. R-0670, elsewhere in today’s
Federal Register.)

The Board’s policy is consistent with
the newly-adopted international capital
standards (see 54 FR 4186, January 27,
1989). The international risk-based
capital guidelines will begin to be
phased in at the end of 1990, and the
new capital measurement for daylight
overdraft cap calculation will become
effective Janaury 10,1991. In 1990, all of
the federal financial regulatory agencies
will begin collecting, as part of their
required reports, data on the amount of
capital that can be used for risk-based
purposes—“qualifying” capital for
commercial and savings banks, "riskbased” capital for savings and loan
associations, and total regulatory
reserves for credit unions.1 Other U.S.
chartered entities incurring Fedwire
overdrafts would have to provide
similar data to their Reserve Banks.
Nineteen commenters supported the
proposal to use risk-based capital to
calculate caps. These commenters
indicated that the change appeared to
be appropriate given that risk-based
capital would be used for other future
regulatory purposes. Three commenters
suggested moving to risk-based capital
at an early stage so that, for those
institutions with risk-based capital
larger than adjusted primary capital,
caps would expanded to “make room”
for book-entry overdrafts. Two
commenters, however, had reservations
about this change. One large commercial
bank stated that, for many institutions,
risk-based capital will be less than the
adjusted primary capita! on which caps
are based today. The Independent
Bankers Association suggested that the
risk-based capital system was too new
to be used as the basis for calculating
caps.
According to a survey taken by the
Federal Reserve during a four-week
1 The minimum ratio of qualifying capital to riskweighted assets for U.S. chartered commercial and
savings banks will be 7.25 percent a t the end of 1990
and 8 percent by the end of 1992. The maximum
allowance for loan loss included in Tier II capital
will decline from 1.5 percent of risk-weighted assets
a t the end of 1990 to 1.25 percent at the end of 1982.
Of the 3.625 percentage points of the Tier I capital
requirement a t the end of 1990,3.25 points must be
stockholders equity; by the end of 1992,
stockholders equity must account for all 4 percent of
Tier I capital. Rules for savings and loan
associations will be similar with a similar schedule,
although a declining amount of supervisory goodwill
will be perm itted for these institutions until 1995, as
m andated by Congress. In contrast to the bank and
other thrift risk-based capital, National Credit
Union Administration rules permit the inclusions,
without limit, of loan and investment loss reserves
for credit unions.-

22094

Federal Register / Vol. 55, No. 105 / Thursday, May 31, 1990 / Notices

period ending August 23,1989, the
impact of the shift to risk-based capital
will likely be modest. Most of the 343
domestic depository institutions that
would have been subject to caps during
the survey period under the Board’s new
policy would have had their caps raised
by the shift to risk-based capital.
Approximately 20 percent of the 317
banks and 40 percent of the 26 thrift
institutions would have had their caps
reduced under the risk-based capital
standards. The banks whose caps would
have declined, including some of the
larger overdrafters, had relatively large
loan loss reserves, only a portion of
which would be eligible for inclusion in
Tier II capital. Most of the negatively
affected thrifts were credit unions with
modest overdrafts. Four of the 343
depository institutions would have
experienced a significant increase in
their cap utilization rates, although they
would have incurred only modest levels
of overdrafts, even with the inclusion of
book-entry overdrafts. Given the limited
impact of risk-based capital standards
on the ability of most depository
institutions to incur daylight overdrafts
under the Board’s cap policy and the
scheduled adoption of these standards
by the federal financial regulatory
agencies, the Board has adopted its
proposed risk-based capital standards
for cap calculation purposes.
CHIPS N et Debits
The Board has adopted its proposal to
eliminate CHIPS net debits from the
cross-system cap, provided that
implementation of settlement finality is
adopted by CHIPS by January 10.1991.
Effective on that date, if CHIPS
settlement finality is in place, an
institution's cap will be applied only to
total Fedwire overdrafts that are subject
to cap.
The New York Clearing House is
scheduled to implement settlement
finality among CHIPS participants in the
third quarter of 1990. Subsequently,
should a CHIPS participant be unable to
settle its net debit position at the close
of a business day, each participant has
agreed to cover the failed participant’s
position on the basis of a pre-arranged
allocation formula; collateral will be
pledged by each participant to assist in
insuring that it will fund this settlement
commitment. In short, CHIPS settlement
on any day will be assured even if a
large participant fails. In addition, this
program should give rise to incentives
for all CHIPS participants to be more
risk-sensitive when they extend
intraday credit limits to their CHIPS
counterparties because these limits will
establish their potential losses should
that counterparty fail.

Fifteen commenters, generally large
commercial banks, agreed with the
exclusion of CHIPS net debits from the
determination of compliance with caps.
One commenter that supported the
change emphasized that CHIPS net
debits should be excluded only after
settlement finality is adopted because of
the likely migration of payments to
CHIPS from Fedwire as a result of
proposed Fedwire overdraft fees.
Another commenter expressed concern
about the ability of CHIPS to handle the
expanded payments volume.
The proposed pricing of Fedwire
overdrafts may cause institutions to
shift payments from Fedwire, with it
settlement finality, to CHIPS. The
systemic risk associated with such a
shift, however, is significantly
diminished by CHIPS settlement finality,
loss allocation, and the resulting
enhanced risk sensitivity of CHIPS
participants. CHIPS settlement finality
is consistent with the Board's goal to
induce participants in the payments
system to limit their own risk exposures
without creating Federal Reserve risk or
significant systemic risk. Such actions
by payments system participants reduce
the necessity for Board policies limiting
private daylight credit exposure.
Over 100 (mostly foreign banks) of the
140 CHIPS participants would not
benefit from the exclusion of CHIPS net
debits from the cap because they do not
incur Fedwire overdrafts, have very low
net debits, or are net creditors on
CHIPS. The policy would benefit 35
large net debtors on CHIPS, that will no
longer need to reduce their Fedwire cap
by the amount of their CHIPS net debits.
The increased Fedwire capacity for
approximately 90 percent of these 35
institutions, however, will be less than
10 percent.
Five commenters opposed the change,
citing the prudential benefits from
greater Federal Reserve supervision and
control of total overdrafts under the
current system. Information on
individual bank positions on CHIPS will
continue to be made available on a daily
basis to the Federal Reserve, facilitating
prudential review of cross-system net
debits. On balance, the Board believes
that such review will be a sufficient
replacement for the current policy after
the new CHIPS rules become effective.
Two commenters raised the issue of
the unsettled legal status of netting
arrangements and requested the Board’s
assistance in obtaining clarifying
legislation. The Board generally
supports the concept of multilateral
netting, and Federal Reserve staff is
currently reviewing proposed netting
legislation.

Exemptions
The Board has adopted a policy, as
proposed, to excuse financially healthy
U.S. chartered depository institutions
that only rarely incur Fedwire
overdrafts in excess of the lesser of $10
million or 20 percent of their capital
from filing board-of-directors’
resolutions or self-assessments with
their Reserve Banks. This dual test is
designed to limit the exclusion to
depository institutions that create only
low-dollar risks to the Reserve Banks
and to those institutions that incur small
overdrafts relative to the institution’s
capital.
Reserve Banks will review the status
of exempt depository institutions that
incur total Fedwire overdrafts in excess
of $10 million or 20 percent of capital on
more than two days in any two rolling
two-week intervals and will decide if
the exemption should be maintained or
if the institutions will be required to file
for a cap. Even for depository
institutions meeting these size and
frequency standards, the exemption
would be granted at the discretion of the
Reserve Bank. The Reserve Bank may
choose to limit its own risk exposure by
unilaterally imposing collateral
requirements and/or a lower cap or a
zero cap. A depository institution on
which a Reserve Bank has imposed a
zero cap, whether or not it has access to
the discount window, will be prohibited
from incurring funds transfer-related
overdrafts. A depository institution with
an imposed zero cap that has access to
the discount window may incur
collateralized book-entry overdrafts, but
institutions with imposed zero caps and
no discount window access may not
incur book-entry overdrafts. Depository
institutions with access to the discount
window are free to file for a cap if they
choose to do so and will be required to
do so if they begin to exceed their
exemption limits. (The Board h as
requested comment on penalty fees for
inadvertent overdrafts incurred by
institutions with imposed zero cans. See
Docket #R-0693, elsewhere in today’s
Federal Register.)
There was no opposition te this
proposal from the commenters. The
proposal was generally viewed by the
commenters as a reduction in burden
that will not increase payments system
risk. The Independent Bankers
Association suggested that the Board go
further and exempt all banks with assets
of less than $500 million because the
risk level they create for the Federal
Reserve is small. During the August 1989
test period, 120 of the 343 nonexempt
institutions had assets of less than $500

Federal Register / Vol. 55, No. 105 / Thursday, May 31, 1990 / Notices
million; these institutions accounted for
only $510 million of the $109.3 billion of
the total Fedwire overdrafts of
nonexempt institutions. Despite the
modest aggregrate risk caused by these
120 institutions, the Board believes they
should be subject to self-assessment and
caps. Exemptiong entities by size of
institution is not indicative of the risk of
overdrafts to the individual institution
and would be inequitable for larger
institutions with similar relative
overdraft exposure.
The Board expects that this policy will
result in a reduced burden to many
institutions with only a marginal
increase in direct Federal Reserve risk.
During the August 1989 test period, 4,015
of the 4,358 depository institutions’
Fedwire overdrafts were within the size
and frequency tests established to
qualify as exempt from filing a cap, yet
those institutions accounted for less
than 0.7 percent of aggregate Fedwire
overdrafts. No exempt institution
exceeded the exemption levels on more
than two days during the 20-day test
period, and most of the exempt
institutions met the exemption criteria
on each day of the test period.
Moreover, most of the dollars of
overdrafts were incurred by depository
institutions that exceeded the exemption
criteria very often; over 85 percent of the
nonexempt overdrafts were incurred by
80 institutions that exceeded the
exemption level each day in the test
period.
De M inimis Caps
The Board has, as proposed, created a
revised de minimis cap category, which
permits U.S. chartered depository
institutions to incur daylight overdrafts
equal to 20 percent of capital, if a boardof-directors’ resolution is submitted. No
self-assessment is required for this cap
category. This replaces the pre-existing
de minimis cap category that imposed,
in addition to a percent of capital
constraint, both a $500,000 limit and a
frequency limit. The Board received 22
comments on the de minimis cap
proposal, all in support of the proposal.
As in the case of the exempt from
filing category, Reserve Banks will have
the discretion to limit their own risk
exposure from de minimis institutions
by imposing unilateral collateral
requirements and/or a lower cap or a
zero cap. De minimis institutions will be
required to file for a higher cap (and do
a self-assessment] if their overdrafts
begin to exceed 20 percent of capital.
Reserve Banks will review the status of
de minimis cap institutions that exceed
their cap on more than two days in any
rolling two-week period and will decide
if the de minimis cap should be

maintained or if the institution will be
required to file for a higher cap.
The new de minimis cap differs from
the exemption category in that, in
exchange for a board-of-directors’
resolution by de minimis depository
institutions) not required of exempt
institutions), the $10 million limit
imposed on exempt institutions will not
apply to de minimis institutions. Thus,
larger institutions that restrain their
daily overdrafts to 20 percent or less of
their capital will not have to do a full
self-assessment.
Competitive Impact Analysis
Under its competitive equity policy,
the Board assesses the competitive
impact of changes that have a
substantial effect on payments system
participants.2 The Board believes these
modifications to its payments system
risk reduction program will have no
adverse effect on the ability of other
service providers to compete effectively
with the Federal Reserve Banks in
providing similar services. These
modifications place controls on the use
of the Federal Reserve Banks’ funds and
book-entry transfer services that are
consistent with controls used in private
clearing and settlement systems.
By order of the Board of Governors of the
Federal Reserve System, May 24,1980.
William W. Wiles,

Secretary of the Board.
[FR Doc. 90-12552 Filed 5-30-80; 8:45 am]
BILLING CODE SJ10-01-M

[Docket No. R-0670]
RfN 7100-AA76

Modifications to the Payments System
Risk Reduction Program; U.S.
Agencies and Branches of Foreign
Banks

Board of Governors of the
Federal Reserve System.
a c t i o n : Policy statement.
agency:

s u m m a r y : A s part of its payments

system risk reduction program, the
Board is adopting a policy that will
allow certain U.S. agencies and
branches of a foreign bank an
uncollateralized daylight overdraft cap
equal to their cap multiple times a U.S.
capital equivalency equal to 10 percent
of the bank’s worldwide capifal,
2 These assessm ent procedures are described in
the Board's policy statem ent entitled ‘The Federal
Reserve in the Payments System" (55 FR 11648,
March 29,1990).

22095

provided the foreign bank’s home
country supervisor adheres to the Basle
Capital Accord. All other foreign banks
will continue to use the current U.S.
capital equivalency to determine their
uncollateralized caps. All measures of
uncollateralized caps are conditioned on
U.S. funding capability and potential
eligible collateral satisfactory to the
administering Reserve Bank. Regardless
of their uncollateralized cap, all U.S.
agencies and branches of foreign banks
may incur collateralized funds
overdrafts up to their cap multiple times
10 percent of their worldwide capital,
and all may incur unlimited
collateralized book-entry overdrafts.
EFFECTIVE DATE: January 10,1991.
FOR FURTHER INFORMATION CONTACT:

Edward C. Ettin, Deputy Director,
Division of Research and Statistics (202/
452-3368), Charles P. Thomas,
Economist, Division of International
Finance (202/452-3698); for the hearing
impaired only. Telecommunications
Device for the Deaf, Earnestine Hill or
Dorothea Thompson (202/452-35440).
SUPPLEMENTARY 1NFORMATEON:

Background
In April 1985, the Board of Governors
adopted a policy to reduce risk on largedollar payments systems. This policy,
implemented in March 1986, established
a maximum amount of intraday funds
overdrafts that depository institutions
are permitted to incur over both Fedwire
and private large-dollar payments
systems l . The maximum, or cap, for
U.S. chartered institutions, is a multiple
of the institution’s capital 2 and is based
on a self-assessment of a depository
institution’s creditworthiness, credit
policies, and operational controls. In
July 1987, the Board adopted a number
of modifications to the daylight
overdraft policy, including a two-step, 25
percent reduction in the cap, thus
reducing the maximum daylight
overdrafts permitted to individual
depository institutions. 3
Like U.S. chartered banks, foreign
banks operating in the U.S. through
agencies and branches (“foreing banks”)
are required to perform a selfassessment and obtain a board-ofdirectors’ resolution to establish a cap
1 Assuming settlement finality is adopted on the
Clearing House Interbank Payments System
(“CHIPS”), the cap will apply to Fedwire overdrafts
only as of January 10,1991 (see Docket #R-0670,
elsewhere in today’s Federal Register).
2 The cap is currently based on adjusted primary
capital, but as of January 10,1991, the cap will be a
multiple of risk-based capita! (see Docket #R-0668,
elsewhere in today’s Federal Register).
3 These reductions became effective in January
and May 1988. See 52 FR 29255 (August 0,1987).

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Federal Register / Vol. 55, No. 105 / Thursday, May 31, 1990 / Notices

multiple. Although foreign banks have
been allowed to apply that cap to
worldwide capital to establish their
cross-system caps (for Fedwire and
CHIPS net debits combined) and their
collateralized Fedwire caps, their
uncollateralized Fedwife funds cap 4 is
the product of their cap multiple and
their much smaller "U.S. capital
equivalency.” 5 In 1987, the Board
considered and determined not to
amend the definition of U.S. capital
equivalency.6 At the request of several
foreign banks, however, the Board
requested comment again in June 1989
on alternative methods of determining
Fedwire caps for foreign banks.7
Specifically, the Board proposed;
• To continue the policy of allowing
uncollateralized Fedwire overdrafts up
to a Fedwire cap based on a cap
multiple times U.S. capital equivalency,
but requested comment on the
appropriate measure of U.S.
equivalency;
• To broaden the definition of
Fedwire overdrafts to include those
resulting from book-entry securities
transfers as well as funds transfers; and
• To continue the policy of allowing
Fedwire overdrafts up to a cap based on
the cap multiple times worldwide
capital, but to require that the total
Fedwire overdraft be collateralized, not
just the amount over the Fedwire cap,
whenever the overdraft is in excess of
the Fedwire cap because of book-entry
overdrafts.
The activity of foreign banks on both
CHIPS and Fedwire has grown rapidly
since 1986 when the Board’s daylight
overdraft policy was implemented.
Foreign banks’ net debits on CHIPS
account for twice that of U.S. banks, as
CHIPS is used mainly for Eurodollar and
foreign exchange settlement. Foreign
banks account for a much smaller
proportion of Fedwire funds overdrafts,
in part because of their low Fedwire
caps. The overdrafts of foreign banks on
both networks are highly concentrated.
In 1989, 20 foreign banks accounted for
over half of all foreign bank net debits
on CHIPS, while five accounted for a
4 Foreign banks have been able to incur Fedwie
overdrafts above their uncollateralized cap if
collateral is pledged for this excess, so long as their
cross-system overdrafts do not exceed their cross­
system cap.
e U.S. capital equivalency is currently defined as
the greater of (1) the sum of the amount of capital
(but not surplus) that would be required of a
national bank being organized at each branch or
agency location or (2) the sum of 5 percent of the
total liabilities of each branch or agency, including
acceptances, but excluding (a) accrued expenses
and (b) amounts due and other liabilities to offices,
branches, and subsidiaries of the foreign bank.
• 52 FR 29255. August 6,1987.
7 54 FR 26108, June 21,1989.

similar proportion of the foreign bank
overdrafts on Fedwire and 20 accounted
for 97 percent of such overdrafts.
In developing its daylight overdraft
policy for foreign banks, the Board has
taken into consideration the fact that
most of a foreign bank’s assets and
liabilities are located and controlled
outside of the United States and are not
under supervisory review by U.S.
authorities. Moreover, the level of dollar
payments of many foreign banks is quite
substantial relative to their assets in the
U.S., their deposits at the Federal
Reserve, and their U.S. money market
funding capacity.
Consequently, there appear to be
practical limits on the ability of
financially healthy and well-supervised
foreign banks to raise dollars at very
short notice in the U.S. market to meet
liquidity needs in the event of credit or
operational problems. Moreover,
although both U.S. and foreign banks
are expected to rely on their own
resources or their private market
funding capacity to meet liquidity needs,
unusual circumstances may require
access to the discount window and the
provision of adequate eligible collateral.
In short, the geographic location of
assets, limited U.S. supervision, the
relative size of dollar flows, limits on
U.S. funding capacity, and limits on
discount window collateral, all played a
role in the Board’s previous policies to
limit Fedwire overdrafts by even wellcapitalized foreign banks. At the same
time, by basing the cross-system cap on
worldwide capital, previous policies
provided foreign banks substantial
flexibility to function their payments
through CHIPS in an institutional
framework in which other banks make a
commercial judgment about the credit
and liquidity capabilities of the foreign
bank through imposition of bilateral
credit limits and CHIPS-specific debit
caps.
U.S. Capital Equivalency and Caps
The Board received 12 responses to its
request for comment on the definition of
U.S. capital equivalency. Both foreign
and U.S. bank commenters stated that
the Fedwire caps were set inequitably
low. The commenters suggested that the
Federal Reserve’s policy did not
recognize the worldwide strength of
foreign banks. Moreover, commenters
noted that the Basle Capital Accord,
which will be phased in starting late this
year, should alleviate the Board’s
concerns about the capital positions and
supervision of those entities whose
home-country supervisors adhere to the
Accord.

Most of the foreign bank commenters
suggested that the uncollateralized
Fedwire cap should be based on total
worldwide capital, just as it is for U.S.
banks. They noted that many U.S. banks
hold a considerable proportion of their
assets offshore. Some commenters,
including the Institute of International
Bankers, suggested that 50 percent of
worldwide capital be used as a
compromise for establishing caps for
foreign banks. Others suggested that
worldwide capital be scaled by the ratio
of U.S. dollar assets (held either in the
U.S. or abroad) to total assets. The
Board’s Large Dollar Payments System
Advisory Group recommended that, for
those banks whose home country has
adopted the Basle Capital Accord, the
Board should develop a new formula for
U.S. capital equivalency that provides
foreign entities improved access to
Fedwire without giving them a
competitive advantage over U.S. banks.
Foreign banks do not use their current
modest Fedwire caps intensively. The
foreign bank commenters noted,
however, that such low utilization rates
are “statistical artifacts” because the
Fedwire caps force foreign banks to rely
mainly on CHIPS to function their
payments. Accordingly, foreign banks
argued that they do not try to use
Fedwire intensively.
In the future, if the Board imposes an
explicit price on Fedwire overdrafts as
proposed,8 foreign banks may prefer to
keep most of their payments business on
CHIPS, where it appears that CHIPS
caps are no more binding for them than
for U.S. banks. Despite that possibility,
there is support from both U.S. and
foreign banks for a more expansive
Fedwire cap for financially strong
foreign banks, and the Board has
determined to provide some relief for
these institutions, based on their
worldwide capital. A larger cap seems
reasonable within a framework of the
Basle Capital Accord, provided that due
regard is taken of foreign banks’ access
to both U.S. dollar liquidity and
acceptable collateral for discount
window loans.
The Board does not believe, however,
that caps for foreign banks should be
based on total worldwide capital. Just
as the yen or sterling business of U.S.
chartered banks is a small proportion of
their worldwide assets and capital, even
with the reserve currency status of the
U.S. dollar. As a result, dollar overdraft
caps based on worldwide capital for
foreign banks would produce caps that
are relatively much larger than caps for
U.S. banks, although these caps would
* 54 FR 26094, June 21,1989.

Federal Register / Vol. 55, No. 105 / Thursday, May 31, 1990 / Notices
be subject to Reserve Bank modification
to reflect U.S. funding capability and the
availability of eligible collateral. This
basis for cap measurement may result in
considerably less relative restraint on
foreign banks than on U.S. banks.
In addition, allowing foreign banks a
cap based on total worldwide capital
could cause competitive inequities
should the Board adopt pricing of
daylight overdrafts over a deductible
based on a percentage of capital. Were
the Board to allow foreign banks to their
caps and deductible on total worldwide
capital, foreign banks would be able to
avoid most (or all) of the cost incurred
by U.S. banks for the same level of
overdrafts.
Therefore, the Board has adopted a
policy that will allow foreign banks to
determine their uncollateralized daylight
overdraft capacity by applying their cap
multiples to a U.S. capital equivalency
equal to 10 percent of worldwide
capital, provided the foreign bank’s
home-country supervisor adheres to the
Basle Capital Accord. For all other
foreign banks, cap multiples will
continue to be applied to the current
U.S. capital equivalency. All measures
of U.S. capital equivalency are
conditioned on Reserve Bank judgment
that the U.S. branch or agency of the
foreign bank has satisfactory U.S.
funding capability and potential eligible
collateral for a loan from the discount
window, should it be unable to cover its
daylight overdraft by the end of the day.
The Board believes the new definition
of U.S. capital equivalency will provide
a significant increase in the capacity for
uncollateralized Fedwire overdrafts for
most foreign banks. Lower ratios, such
as 5 percent of worldwide capital, would
reduce Fedwire overdraft capacity,
especially among the largest foreign
bank Fedwire users. A new U.S. capital
equivalency for foreign banks based on
10 percent of worldwide capital appears
not only to provide significant increases
in overdraft capacity for virtually all
foreign banks, but also to provide them
with the capability of shifting all of their
CHIPS business (in most cases) to
Fedwire—an unlikely event, especially if
Fedwire overdrafts are priced. Higher
capital equivalencies would not only be
redundant but would, with Fedwire
overdraft pricing and deductible based
on U.S. capital eqivalency, sharply
reduce the Fedwire cost to these banks,
giving them a competitive advantage
over U.S. banks.
In addition to competitive equity and
prudential concerns with the use of total
worldwide capital by foreign banks, the
Board believes its concern about the
late-in-the-day funding capacity of
F
oreign banks in the U.S. money market

is still a significant factor, should those
banks be unable to fund their Fedwire
overdrafts due to operational or other
reasons. The need in such circumstances
to provide an overnight discount
window loan is obvious, and
satisfactory collateral for such loans is
required by statute. Thus, the Board’s
policy takes into account the access of
foreign banks to U.S. dollar liquidity.
When implementing the new U.S.
capital equivalency measure, in the
absence of contrary information, the
Reserve Banks will presume that all
banks chartered in G-10 countries (the
Basle Capital Accord signatories) have
met the acceptable prudential capital/
supervisory standards, and will consider
any band chartered in any other nation
that adopts the Basle Capital Accord
standards (or requires capital at least as
large and in the same form as called for
by the Accord) eligible for the Reserve
Banks’ review for meeting acceptable
prudential capital,/supervisory
standards. Banks from G-10 countries,
as well as those from other nations that
adhere to the Basle Capital Accord, that
otherwise meet Reserve Bank capital/
supervisory standards will be
authorized to file for an uncollateralized
cap based on a U.S. capital equivalency
equal to 10 percent of worldwide
capital, subject to Reserve Bank
adjustments for funding capabilities and
potential eligible collateral. All other
banks will be authorized to file for an
uncollateralized cap based on the
current U.S. capital equivalency.
The administering Reserve Banks will
review the caps submitted by all U.S.
branches and agencies of foreign banks
and may modify the institution’s
overdraft capacity using the following
guidelines:
(1) Uncollateralized Fedwire capacity
should be consistent with the
demonstrated ability of the branch or
agency to access dollar liquidity in the
U.S. market, and, if it is not consistent,
Fedwire capacity should be reduced by
the Reserve Bank to a level consistent
with that ability, regardless of any
collateral that the foreign bank has
pledged (or is willing to pledge) to the
Reserve Bank.
(2) Uncollateralized Fedwire capacity
also should be consistent with the
demonstrated ability of the foreign bank
to provide, under stressful market
conditions, acceptable discount window
collateral for the full potential exposure
to the Federal Reserve.
(3) In no case should the
uncollateralized Fedwire capacity
exceed the smaller of the cap multiple
times the appropriate U.S. capital
equivalency, the U.S. funding capacity
of the branches and agencies, or what

22097

the Reserve Bank believes to be eligible
discount window collateral.
The ability of Reserve Banks*to
modify overdraft capacity will permit
Reserve Banks to limit their own risks
on a case-by-case basis and assure that
caps are consistent with both a foreign
bank’s access to the U.S. money market
and its ability to fund itself under
stressful conditions, including discount
window access.
The adjustment to each foreign bank’s
overdraft capacity could well become
the basis for the deductible, should
pricing be adopted. In order to avoid
large deductibles for pricing linked to
relatively small effective caps, the
amount on which the deductible is
based could be reduced if the cap is
reduced by the Reserve Bank and might
be equal to the lower of the U.S. capital
equivalency or the cap.
Further, the changes in measuring
daylight overdrafts for U.S. chartered
institutions, including combining funds
and book-entry securities overdrafts,
requiring collateral for book-entry
overdrafts exceeding caps, and
excluding net debits on CHIPS
(assuming CHIPS implements settlement
finality) 9 will also be applied to foreign
banks. All foreign banks will maintain
their market-determined access to
CHIPS, unfettered by the Board’s
daylight overdraft policy.
In addition, the Board’s policies on
exemptions from cap (Fedwire
overdrafts less than $10 million and 20
percent of the appropriate U.S. capital
equivalency) and the de minimis cap
(Fedwire overdrafts less than 20 percent
of the appropriate U.S. capital
equivalency) are applicable to foreign
banks to the same extent as they apply
to U.S. institutions.10 Moreover, homecountry supervisors of banks with U.S.
branches and agencies will be advised
by the administering Reserve Bank of
the Fedwire capacity of banks under
their jurisdiction, as well as of other
pertinent conditions about their caps.
Home-country supervisors requesting
information on the Fedwire overdrafts of
their banks will be provided that
information on a regular basis.
Collateralized Overdrafts in Excess o f
Caps
In its June 1989 request for comment,
the Board proposed to require
collateralization of a foreign bank’s
entire Fedwire overdraft if the bank
exceeded its Fedwire cap due to book9 See Docket #R-0669. elsewhere in today’s
Federal Register.
10 See Docket #R-0668, elsewhere in today’s
Federal Register

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Federal Register / Vol. 55, No. 105 / Thursday, May 31, 1990 / Notices

entry overdrafts. The proposal was
motivated by the desire both to assure
sufficient collateral for the entire
overdraft should a discount window
loan be required and to strengthen the
Reserve Bank’s interest in the collateral
should the bank fail before the overdraft
was extinguished.
Fourteen commenters explicitly
addressed the issue of full
collateralization of overdrafts. Of these,
three agreed with the proposed policy
while eleven disagreed with it.
One commenter noted that, as with
the definition of U.S. capital
equivalency, the proposed policy on
collateralization would encourage
foreign banks to participate more in
available netting practices Another
commenter supported the proposal as a
matter of equity, stating that, if domestic
institutions are to be subject to
collateral requirements and to a Fedwire
cap based on their capital, then foreign
institutions’ branches and agencies
should be subject to similar, if not the
same, types of risk controls.
Those that objected to the proposed
policy did so for a variety of reasons.
Most of those objecting to the policy
thought it was unfair to apply full
collateralization to only those U.S.based institutions that frequently and
materially exceed their Fedwire cap
because of book-entry security
overdrafts, but to require all foreignbased banks to fully collateralize their
overdrafts when they exceed their
Fedwire caps.
Another foreign bank commented
that, under the proposed policy, the
collateral required to support its existing
and anticipated Fedwire payments
volume exceeds its available collateral
now in the United states and thought
that it might prove more economical to
route Fedwire payments through the
large U.S. banks than to incur the
administrative overhead associated with
collateralizing overdrafts. The
commenter noted that this would require
it to share information about its
payments flows with competitors.
Several commenters thought that the
proposed policy would increase the risk
to the U.S. payments system by reducing
the presence of some very strong foreign
institutions and by further concentrating
the U.S. payments system.
One commenter supported the
complete collateralization requirement
but expressed concern about the model
set by the U.S. policy for developments
in foreign payments system practices.
The commenter saw this policy initiative
as an opportunity for the Board to
promote the principle that assets used to
support payment activities need not be
located in that particular country. The

■I

commenter urged the Board to consider
using assets denominated in the home
currency as a secondary source of
collateral. The commenter proposed that
these assets could be held at the homecountry central bank or supervisory
authority and pledged to its Reserve
Bank. Similarly, two foreign banks
suggested that U.S. Treasury securities
booked in the name of non-U.S. offices
be accepted as collateral because their
book-entry form made it possible for the
Reserve Banks to perfect an interest in
that collateral.
A domestic bank recommended that
the Board abandon altogether the
collateralization requirement for
overdrafts of foreign bank branches and
agencies and instead focus its attention
on the financial strength of institutions
seeking to base their caps on worldwide
capital. It suggested that, in cases where
the likelihood of default by an
institution is equivalent to that posed by
an equally sound U.S. bank, worldwide
capital be used for setting caps without
collateralization of any part of the
overdraft and that, in other cases, the
institution’s cap should be based on U.S.
capital equivalency.
The Board has adopted a policy to
permit all foreign banks, regardless of
their uncoilateralized cap, to incur funds
overdrafts up to an amount equal to
their cap multiple times 10 percent of
their worldwide capital (as long as the
amount of the overdraft above the
uncollateralized cap is collateralized)
and unlimited collateralized book-entry
overdrafts. This policy offers all foreign
banks, under terms that reasonably limit
Reserve Bank risk, a level of overdrafts
based on the same proportion of their
worldwide capital. Under the policy,
banks chartered in countries that follow
the Basle Accord with demonstrated
collateral and funding capacity will not
receive a larger cap than they already
have (the cap multiple times 10 percent
of worldwide capital), and except for
book-entry overdrafts, will not be
permitted to incur overdrafts above that
cap, even with collateral. All other
foreign banks may incur overdrafts to
the same extent as banks from Basle
Accord countries, i.e., up to their cap
multiple times 10 percent of their
worldwide capital, provided that
sufficient collateral is posted for any
overdrafts in excess of the cap based on
their U.S. capital equivalency. As
discussed in Docket #R-0669, elsewhere
in today's Federal Register, foreign
banks may choose to collateralize their
book-entry overdrafts, even if they do
not exceed their caps, and such secured
overdrafts shall not be included with
those overdrafts measured against the
cap.

Competitive Impact Analysis

Under its competitive equity policy,
the Board assesses the competitive
impact of changes that have a
substantial effect on payments system
participants.11 The Board believes
these modifications to its payments
system risk reduction program will have
no adverse effect on the ability of other
service providers to compete effectively
with the Federal Reserve Banks in
providing similar services. These
modifications place controls on the use
of the Federal Reserve Banks’ funds and
book-entry transfer services, which are
consistent with controls used in private
clearing and settlement systems.
By order of the Board of Governors of the
Federal Reserve System, May 24,1990.
William W. Wiles,

Secretary of the Board.
[FR Doc. 90-12554 Filed 5-30-90; 8:45 am]
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