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Feder
R
al
eserve
Bank
O F DALLAS
TONY J . SALVAGGIO
DALLAS, TEXAS
75265-5906
FIR S T V IC E PR ES ID EN T
M arch 16, 1995
Notice 95-34
TO:
The Chief Operating Officer of
each financial institution in the
Eleventh Federal Reserve District
SUBJECT
Modified Increase in the Fee Charged to
Depository Institutions for Daylight Overdrafts
DETAILS
The Board of Governors of the Federal Reserve System has modified the
increase in the daylight overdraft fee, scheduled to become effective April 13, 1995. As
a result of the Board’s action, average intraday overdrafts in accounts with Reserve
Banks above a capital-based deductible will be charged a fee of 15 basis points, based
upon the current 10-hour standard Fedwire operating day. The fee had been scheduled
to increase to 20 basis points. The Board will evaluate the desirability of any further
increases in the daylight overdraft fee two years after the implementation of the 15 basis
point fee.
The Board’s actions take into account the potential for further improvements
in settlem ent practices and reductions in payment system risk as well as concerns about
the possible effects of further rapid fee increases. The Board’s actions also recognize
that sizable reductions in daylight overdrafts have already been achieved with a fee of 10
basis points.
In addition, a modification was made to the language used in question
num ber 2 of the Monitoring Customer Interday Payment Activity section (Section 3.D,
page A-26) of the Guide to the Federal Reserve’s Payments System Risk Policy. The
language was changed to ease the requirem ent that depository institutions wishing to
adopt a self-assessment net debit cap be able to m onitor in real-time the ACH credit
For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333 -4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston
Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
originations of all customers. The change will require the ability to monitor in real-time
the A CH credit originations of customers in weak financial condition only.
This change became effective January 1, 1995.
ATTACHMENTS
A copy of the Board’s notice (Federal Reserve System Docket No. R-0806)
and a copy of the modified section of the Guide to the Federal Reserve’s Payments
System Risk Policy (Section 3.D, page A-26) are attached.
MORE INFORMATION
For more information, please contact James Smith at (214) 922-5585 at the
Dallas Office. Depository institutions in the El Paso territory should contact Annabelle
Betancourt at (915) 521-8210. Depository institutions in the Houston territory should
contact Sandra Douglas at (713) 652-9136. Depository institutions in the San Antonio
territory should contact Janice Stolle at (210) 978-1435.
For additional copies of this Bank’s notice, please contact the Public Affairs
D epartm ent at (214) 922-5254.
Sincerely,
FEDERAL RESERVE SYSTEM
[Docket No. R-0806]
Policy Statement on Payments System Risk;
Daylight Overdraft Pricing
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Policy Statement.
SUMMARY:
The Board has approved a modification of the increase
in the fee charged to depository institutions for daylight
overdrafts incurred in their accounts at the Reserve Banks that
had been scheduled to take effect on April 13, 1995.
As a result
of the sizeable reductions in daylight overdrafts already
achieved, as well as concerns about the possible effects of
further rapid fee increases, the Board has approved an increase
in the daylight overdraft fee to an effective daily rate of 15
basis points rather than 20 basis points.
(The 15-basis-point
fee eguals an annual rate of 36 basis points, quoted on the basis
of a 360-day year and a 24-hour day.)
The Board will evaluate
the desirability of any further increases in the daylight
overdraft fee, based on the objectives of the payments system
risk program, two years after the implementation of the 15-basispoint fee.
Any changes in the fee resulting from that review
will be announced with a reasonable lead-time for implementation.
EFFECTIVE DATE: April 13, 1995.
FOR FURTHER INFORMATION CONTACT: Jeffrey C. Marquardt, Assistant
Director (202/452-2360)
or Paul Bettge, Manager (202/452-3174),
Division of Reserve Bank Operations and Payment Systems, Board of
Governors of the Federal Reserve System.
For the hearing
impaired only: Telecommunications Device for the Deaf, Dorothea
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Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
I. Background on the Daylight Overdraft Fee Policy
The Board's initial policy statement aimed at
controlling daylight overdrafts, which became effective in 1986
(50 FR 21120, May 22, 1985), encouraged depository institutions
to establish voluntary daylight overdraft limits, or caps, across
all large-value payment systems.
The cap levels were
subsequently reduced by the Board, effective in 1988, in an
effort to reduce further the level of overdrafts
(52 FR 29255,
August 6, 1987).
While daylight overdrafts associated with funds
transfers appeared to stabilize somewhat after the introduction
of caps, daylight overdrafts associated with securities
transfers, which were exempt from the original caps, continued to
grow strongly.
The Board became concerned, however, that further
reductions in cap levels might seriously disrupt long-established
market practices for settling financial transactions.
Thus,
in
1987, the Board commissioned two studies of the fundamental
issues concerning payments system risk by a staff task force and
an industry advisory group.
Both groups agreed that the Federal
Reserve's provision of free daylight overdraft credit was a
subsidy that encouraged the overuse of such credit by private
institutions.
The advisory group emphasized the flexibility of
daylight overdraft fees as a market-oriented means of allocating
daylight credit to depository institutions that valued it most
highly, while allowing them to determine the least costly means
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of reducing these overdrafts.
The task force identified the following set of public
policy objectives for the Board's daylight overdraft program:
•
low direct credit risk to the
Federal Reserve,
•
low direct credit risk to the
private sector,
•
low systemic risk,
•
rapid final payments,
•
low operating expense of making payments,
•
equitable treatment of all service providers and users in
the payments system,
•
effective tools for implementing monetary policy,
and
•
low transaction costs in the Treasury securities
market.
The
task force recognized that the
pursuit of these objectives
might, at times, result in competing policy goals, and that
policy options would need to be evaluated on the basis of whether
they achieved an appropriate balance of the objectives.
In
particular, a policy might need to balance considerations of
direct risks to the Federal Reserve, on the one hand, and
systemic risks on the other.
After completion of the two studies, the Board sought
public comment on the issues associated with charging fees for
daylight overdrafts, along with a number of other issues relating
to its payments system risk program.
The Board abolished cross
system net debit caps, but retained caps on overdrafts in Federal
Reserve accounts, effective in 1991 (55 FR 22087, May 31, 1990).
In 1992, the Board announced its intention to charge fees for
-
daylight overdrafts
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(57 FR 47084, October 14, 1992).
The Board
also announced that the fee would be phased in so the Board could
monitor the impact of the fee and make adjustments,
if necessary.
The current effective daily fee of 10 basis points was
implemented on April 14, 1994.
Under the policy adopted in 1992,
the fee is scheduled to increase to 20 basis points on April 13,
1995, and to 25 basis points on April 11, 1996.
(The annual rate
charged for daylight overdrafts is quoted on the basis of a 360day year and a 24-hour day.
The annual rates are officially
quoted as 24, 48, and 60 basis points.
The annual rate is
converted to an effective daily rate by multiplying it by the
fraction of the day that the Fedwire funds transfer system
operates, currently 10 hours out of 24.
This document will refer
to the effective daily rates, because they are commonly used in
public discussions of the daylight overdraft fee.)
II. Impact of the Initial Daylight Overdraft Fee
In the aggregate, daylight overdrafts in Federal
Reserve accounts have fallen by roughly 40 percent in response to
the initial 10-basis-point fee.
Significant reductions in
overdrafts occurred immediately upon implementation of fees, and
the resulting levels of overdrafts have remained fairly constant
since that time.
Peak overdrafts, defined as the maximum
aggregate daylight overdraft at the end of each minute during an
operating day, have fallen from $124 billion, on average, during
the six months before implementation of fees, to $70 billion, on
average,
from April 14 through the last reserve maintenance
period in 1994.
Over the same period, aggregate per-minute
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average overdrafts, the base measure upon which fees are
assessed, dropped from $70 billion to $43 billion.
These figures
represent reductions of 4 3 percent and 3 9 percent respectively,
in aggregate peak and per-minute average overdrafts.
The reduction in overdrafts has been concentrated among
a few institutions.
For the six institutions with the largest
daylight overdrafts
(per-minute average overdrafts since April
14, 1994, of at least $1 billion), average overdrafts have fallen
by $25 billion overall, or 48 percent.
97 percent
This decline represents
of the total reduction in per-minute average
overdrafts.
In contrast,
44 institutions with overdrafts between
$100 million and $1 billion had increased overdrafts, on average,
with the implementation of fees.
Thus, daylight overdraft fees
appear to have resulted in a reduction in daylight overdrafts in
the aggregate, as well as a reallocation of daylight overdrafts
among institutions.
A large portion of the reduction in overdraft levels
observed since April has been related to securities-transfer
activity on Fedwire.
Average securities-related daylight
overdrafts
in Federal Reserve accounts have decreased by
47 percent
since implementation of daylight overdraft fees.
By
contrast, average Fedwire-funds-related and non-Fedwire-related
daylight overdrafts combined have decreased by 26 percent.
III. Impact on the Financial Markets
Government Securities Market.
The significant reduction in overdrafts related to
securities-transfer activity is due primarily to changes in
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settlement patterns in the government securities market,
in
particular the overnight repurchase agreement (RP) market, and to
the concentration of government securities clearing services
among a few institutions— the securities clearing banks.
Typically,
securities dealers finance their inventories of
government securities through overnight RPs with institutional
investors, who exchange cash for securities and hold the
securities overnight in accounts at custodian depository
institutions.
These securities are usually returned on Fedwire
to the dealers' clearing banks by the custodian banks at the
opening of business.
Because funds are simultaneously debited
from the clearing banks' accounts when the securities are
transferred on Fedwire, substantial overdrafts are created in the
clearing banks' accounts at the Federal Reserve.
Overdrafts
persist until new RPs are arranged and settled by deliveries of
securities out of accounts at the securities clearing banks later
in the day.
Before implementation of daylight overdraft fees,
these overdrafts typically reached a peak at around
11:00 a.m. E T .
The concentration of RP clearing activity at the
securities clearing banks, along with the substantial associated
daylight overdrafts,
led these institutions to expect sizeable
daylight overdraft charges.
As a result, they developed
automated systems to allocate daylight overdraft charges to the
customers whose RP activity generated the overdrafts.
Thus,
strong incentives were created for securities dealers to modify
RP trading and settlement practices in order to minimize charges
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assessed by the clearing banks.
Since the implementation of daylight overdraft fees,
securities dealers have accelerated the morning practice of
arranging RPs, as well as the identification and pricing of the
related RP securities.
This practice has significantly improved
the speed with which securities are delivered to
RP counterparties, thereby shifting funds back to the clearing
banks earlier in the day and reducing their average overdrafts at
the Reserve Banks.
In the aggregate, securities-related
overdrafts now reach their maximum much earlier in the morning,
at roughly 9:30 a.m. ET, and the largest overdrafts persist for a
shorter time.
The decrease in securities-related daylight overdrafts
may also be attributable,
in part, to an increase in tri-party
repurchase agreement activity.
In a tri-party RP, both parties
hold securities through a common securities custodian, and the
transfer of RP securities is executed on the books of the
custodian rather than on Fedwire.
Tri-party RPs may reduce
daylight overdrafts if funds are also maintained at the custodian
institution and not returned to investors on Fedwire during the
day.
Although no statistics are available on tri-party RP
volume, major institutions have reported a large increase in tri
party RPs as a result of daylight overdraft fees.
It should be
noted, however, that steady growth in tri-party volume had been
reported even before implementation of fees.
Other Markets and Transactions.
Daylight overdrafts related to Fedwire funds transfers
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are more widely dispersed across depository institutions, are
generated by settlement practices associated with a variety of
market activities, and are characterized by a much different
intraday pattern than those related to securities transfers.
The
largest aggregate funds-related overdrafts occur between the
hours of 12:30 p.m. and 4:30 p.m. ET, with the intraday peak
generally occurring at around 2:30 p.m.
This period corresponds
to the current settlement timing conventions, or "window," for
federal funds contracts in which overnight borrowings are repaid
in the morning and the proceeds from new contracts are received
in the afternoon.
In addition,
it is during the mid-afternoon
period that other payment systems, such as securities
depositories,
impose the greatest settlement funding requirements
on their members, further contributing to funds-related
overdrafts in accounts at Reserve Banks.
Because funds-related overdrafts and associated
daylight overdraft charges are widely dispersed among
institutions, the incentives to change market conventions or risk
disrupting customer relationships are much smaller in the funds
markets than in the securities markets.1 As a result, the
intraday patterns of settlements that use the Fedwire funds
transfer service as well as funds-related overdrafts have
remained largely unchanged.
Further, the aggregate level of
1
One exception is a procedural change implemented in
response to daylight overdraft fees by the Participants Trust
Company to permit partial disbursement of principal and interest
payments on securities held at the depository to its participants
earlier in the day.
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funds-related overdrafts has been reduced only moderately.
When the Board adopted the daylight overdraft fee
policy in 1992, it identified a number of measures that
institutions might take to reduce funds-related overdrafts.
These included delays of less time-critical funds transfers, a
shift of funds transfer activity from Fedwire to CHIPS, increased
netting of funding contracts, the development of an intraday
funds market, and the use of time-specific deliveries of funds.
So far, these potential responses appear to have been
implemented only to a limited degree.
First, only four to
five percent of daily Fedwire funds transfer value has shifted
from before noon to later in the day, with a negligible impact on
transfer volume.
Second, discussions with market participants
indicate that few institutions have shifted payments from Fedwire
to CHIPS.
Third, anecdotal evidence suggests that institutions
have increased somewhat their use of netting for overnight
federal funds contracts, yet it is unclear whether the increase
is the result of daylight overdraft fees or other developments in
the funds markets.
Anecdotal evidence also suggests that
institutions have increased their use of term federal funds
contracts, although market participants suggest this increase may
be related more to interest rate developments than to daylight
overdraft fees.
Finally, neither an intraday market nor a
significant increase in the time-specific delivery of funds has
materialized since the implementation of daylight overdraft
fees.
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IV. Fee Options Considered by the Board
In keeping with its policy of monitoring the impact of
the fee during the phase-in period and adjusting it, if
necessary, the Board considered three options for the next phase
of the daylight overdraft fee: increase the fee to 20 basis
points as scheduled,
leave the fee at 10 basis points, or
increase the fee to an intermediate level of 15 basis points for
at least two years.
Increase the Fee to 20 Basis Points as Announced.
By most accounts, the implementation of the initial
daylight overdraft fee has been a success.
The 10-basis-point
fee dramatically reduced the aggregate amount of daylight credit
provided by the Federal Reserve, along with the associated direct
credit risk, with little disruption in the financial sector.
The
fact that such a large reduction in overdrafts was possible as a
result of a small fee suggests that the economic inefficiencies
created by the provision of free daylight credit were
substantial.
The Board believes that a further increase in the
fee will tend to reduce or eliminate any remaining subsidies
associated with Federal Reserve daylight credit and reduce
inefficiencies in the use of such credit.
The Board considered that implementation of the
previously announced increase in the fee to 20 basis points might
prompt institutions to take additional steps to improve payment
practices and reduce the use of daylight credit along with
associated credit risks.
The Board also believes, however, that
an increase in the fee to 20 basis points at this time could
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increase the probability of undesirable market effects contrary
to the objectives of the Board's risk-control program.
Perhaps the
increases
overriding concern is the potential for
in systemic risk.
The Board believes that systemic
risk could increase if the higher fee were to induce a
significant shift of payment activity from Fedwire, where
transfers are immediately final and credit risk is absorbed and
controlled by the central bank, to private systems, where
payments are often provisional, risks are less transparent, and,
in some cases, risks may not be fully controlled.
A significant shift in transfer volume from Fedwire to
CHIPS, for example, would be more likely to occur with a higher
fee.
Such a shift could increase systemic risk somewhat even
though elaborate risk
extent to
controls have been installed on CHIPS.The
which funds transfer volume would shift from Fedwire to
CHIPS, however,
is uncertain.
CHIPS has historically been used
primarily to settle international transactions, yet CHIPS
participants might begin to use CHIPS routinely for domestic as
well as international funds transfers.
In the longer term, CHIPS
potentially could attract additional members and significantly
increase the scale of its domestic funds transfer activities.
Industry participants have also suggested that the
automated clearing house (ACH) system, typically associated with
small-dollar transfers, could be used to make large-dollar
payments traditionally made on Fedwire.
Such a shift could
increase systemic risk, because credit transfers made through ACH
systems are provisional payments and real-time risk controls may
-
be difficult to implement.
12
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Anecdotal evidence suggests that, so
far, there has been a small increase in the use of the ACH system
for large-dollar payments.
There is also an increased likelihood that a higher
daylight overdraft fee could prompt a shift in securities
transfer activity from Fedwire to private securities depositories
and the securities clearing banks.
For example,
in 1994 the
Participants Trust Company (PTC) announced an initiative to make
certain mortgage-backed federal agency securities eligible for
its system.
Also in 1994, the Depository Trust Company (DTC)
issued a study of the feasibility of expanding its services to
include U.S. government and federal agency securities,
mortgage-backed securities,
securities system.
including
in its same-day funds settlement
In addition, the securities clearing banks
might seek the custodial business of large institutional
investors, who tend to hold large intraday funds balances,
in
order to increase tri-party RP volume and reduce daylight
overdraft charges.
The result of these potential developments
could be an increased concentration of collateral, clearing, and
deposit risks at private securities depositories and the clearing
banks.
The probability that funds and securities transfer
activity would move off Fedwire is influenced by both cost and
risk considerations.
CHIPS, PTC and DTC incorporate net debit
caps and collateralization requirements as part of their risk
management systems.
As a result, participants in these systems
would have to weigh the costs of posting additional collateral to
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support additional payment activity against the costs of
incurring daylight overdrafts in Federal Reserve accounts, as
well as other factors such as settlement speed and finality.
In
the case of tri-party RPs, the large institutional RP
counterparties are likely to be aware of the custodial risks in
tri-party RPs and might demand a higher return for tri-party RPs
as a result.
If so, the premium for these tri-party RPs might be
more costly to dealers than daylight overdraft charges.
In addition to possible increases in systemic risk, a
higher daylight overdraft fee could cause further delays in
Fedwire funds transfers.2
Furthermore,
if payment volume moves
to later in the day, there is less time available for
institutions to recover from unforeseen operational problems and
meet settlement obligations by the end of the banking day.
As
noted earlier, however, there has been only a modest shift in
payments to later in the day with the 10-basis-point fee, and it
remains unclear at what level the fee might cause excessive
payment delays or disruptions in the financial sector.
The Board also considered the potential for detrimental
effects on the government securities market from a 20-basis-point
fee.
The Public Securities Association (PSA) has stated publicly
that all possible low-cost behavioral changes in the government
securities markets to reduce overdrafts have already been made.
The PSA expects that increases in costs to securities dealers
2
In the extreme, delays could ultimately result in payment
"gridlock" as each institution, in order to avoid daylight
overdraft fees, awaits incoming payments before initiating its
own payments.
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from a higher daylight overdraft fee would ultimately be passed
on to the Treasury in the form of higher borrowing costs, without
any further reduction in overdrafts.
It should be recognized, however, that the costs
incurred so far by the securities dealers have largely been fixed
costs to upgrade systems that will not be incurred again.
Furthermore, the incremental impact of increased costs that might
result from a higher daylight overdraft fee is quite small
relative to the tick size in the auctions or secondary market for
U.S. government and federal agency securities.
Also, Federal
Reserve daylight overdraft charges passed through by the clearing
banks to the dealers would ultimately be recouped by the Treasury
through the Federal Reserve's payment to the Treasury of its net
earnings.
Maintain the Fee at 10 Basis Points.
The Board considered maintaining the fee at 10 basis
points based on the significant reductions in daylight overdrafts
that have already occurred and concerns about undesirable
systemic risks that might result from a higher fee.
The Board
decided that if the fee were not increased, there would be very
limited incentives for additional reductions in daylight
overdrafts and credit risk.
Furthermore, the Board was concerned
that the momentum in the financial markets for the serious review
and improvement of payment and settlement conventions might be
lost if the fee were not increased.
Increase the Fee to 15 Basis Points for at Least Two Years.
The Board's decision to increase the fee to 15 rather
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than 20 basis points was based on three primary considerations.
First, as noted above, the response by depository institutions
and securities dealers to the 10-basis-point fee has improved
RP settlement practices and has reduced significantly the use of
Federal Reserve securities-related daylight credit, which before
implementation of daylight overdraft fees constituted a large and
growing portion of total daylight credit.
The strong response in
securities markets eases the need for sizeable increases in
daylight overdraft fees over the next two years.
Instead, a more
limited increase to 15 basis points would provide incentives for
additional improvements in securities settlements, while limiting
increases in daylight overdraft charges borne by securities
market participants.
The improvements in settlement practices
might include the use of time-specific deliveries of RP
securities and the greater use of netting contracts between
counterparties, where appropriate.
Allowing two years before
considering additional fee increases will permit sufficient time
for the study of other potential changes in market conventions
that could help reduce securities-related daylight overdrafts.
Second, the Board believes that an increase in the
daylight overdraft fee to 15 basis points will provide additional
incentives for participants in funds markets to evaluate and
modify payment practices that create daylight overdrafts.
As
discussed earlier, the responses in funds markets that the Board
anticipated when it originally adopted the fee policy have not
occurred to a significant degree.
The uncertainty about the
strength of the market response to daylight overdraft fees at
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various fee levels was one of the reasons that the Board
announced that fees would be phased-in beginning at 10 basis
points.
The lack of significant response in the funds markets
suggests that there is still room for improvements in funding and
settlement practices and reductions in daylight overdrafts.
Improvements in funding practices might include the
greater use of "rollovers," "continuing contracts," or "term
contracts" for federal funds transactions, where appropriate.
Further, the Payments Risk Committee, a committee of
representatives from a selection of large U.S. depository
institutions, has suggested that a higher fee may prompt the
market to study changes in federal funds and other settlement
timing conventions that contribute to a large portion of the
aggregate level of daylight overdrafts.
Also, a higher fee may
prompt institutions to take measures to reduce daylight
overdrafts related to customer payment activity.
Third, the Board believes that concerns about systemic
risk argue for a more gradual approach to raising daylight
overdraft fees.
It is important to note that the Board has taken
a number of steps to limit systemic risks in the payments system,
including adopting policies that apply to private-sector payment
networks.3
Most recently, the Board adopted a revised policy
statement on risks in large-dollar multilateral netting systems
3
These policies include those for private large-dollar
multilateral netting systems and private delivery-against-payment
securities systems (54 FR 26092, 26104, June 21, 1989).
In
addition, in 1991, the New York Clearing House adopted changes to
the CHIPS rules designed to enhance the assurances of settlement
through the use of loss sharing and collateral requirements.
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(59 FR 67534, December 29, 1994).
-
This policy statement applied
the Lamfalussy minimum standards for netting arrangements to
domestic as well as off-shore multilateral netting systems that
clear U.S. dollar payments.
At the same time, the Board
announced that the staff would continue to study systemic risks
in small-dollar payment systems, such as check and ACH clearing
systems, as well as the need for any public policy changes in
this area.
Thus, at this time, a limited increase in the daylight
overdraft fee, particularly an increase to 15 basis points
instead of 20 basis points,
is likely to create very little
incremental systemic risk in private-sector payment systems.
In
case greater concerns develop regarding systemic risks, the Board
retains the option of reducing daylight overdraft fees and taking
other appropriate measures to help limit such risks.
The Board believes that the daylight overdraft fee
program has been an important part of efforts by both the Board
and the private sector over a number of years to reduce risk in
the payments system.
The fundamental theory of charging fees has
been that cost-effective behavioral changes to reduce risks would
be taken by depository institutions and their customers if modest
fees were charged for daylight credit.
Some changes in payment
practices have already taken place, and additional changes appear
to be possible.
Thus, the Board believes a modest increase in
the daylight overdraft fee at this time will continue to
encourage private-sector efforts to reduce risks and to improve
efficiency in the nation's payment and settlement systems.
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V. Competitive Impact Analysis
The Board has established procedures for assessing the
competitive impact of rule or policy changes that have a
substantial impact on payments system participants.4
Under these
procedures, the Board will assess whether a change would have a
direct and material adverse effect on the ability of other
service providers to compete efficiently with the Federal Reserve
in providing similar services due to differing legal powers or
constraints, or due to a dominant market position of the Federal
Reserve deriving from such differences.
If no reasonable
modifications would mitigate the adverse competitive effects, the
Board will determine whether the anticipated benefits are
significant enough to proceed with the change despite the adverse
effects.
As noted in the Board's 1992 announcement of the
daylight overdraft fee policy, the Board does not believe that
imposition of daylight overdraft fees adversely affects the
ability of private-sector payments system participants to compete
with the Reserve Banks in providing payments services.
Private-
sector correspondent banks have the ability to charge for
intraday credit extended to their customers, either explicitly
(as do the Reserve Banks)
service fees.
or implicitly as part of overall
The Board stated in 1992 that private-sector
payment systems might benefit from daylight overdraft fees, if
4
These procedures are described in the Board's policy
statement "The Federal Reserve in the Payments System," as
revised in March 1990. (55 FR 11648, March 29, 1990).
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the fee caused institutions to shift payments from the Federal
Reserve to private systems in order to avoid daylight overdraft
fees.
Although the shift to private systems might not be as
large under a 15-basis-point fee as under a 20-basis-point fee,
the Board believes that the lower fee might still produce payment
shifts, as discussed in the supplementary information above, as
well as a reduced cost burden for private-sector payments system
participants.
VI. Administrative Procedure Act
The notice and comment requirements of the
Administrative Procedure Act ("APA") do not apply to matters
relating to "public property,
(5 U.S.C. 553(a)(2))
loans, grants, or contracts."
The daylight overdraft fee relates to
"loans," in that the fee is for an extension of intraday credit
by Federal Reserve Banks, and "contracts," in that the fee is
part of an agreement between institutions and the Federal Reserve
Banks for the provision of Reserve Bank payment services.
Therefore, the APA does not require the Board to seek notice and
comment on the fee revision.
Additionally, the Board finds for good cause that
notice and comment on the fee revision is unnecessary,
accordance with 5 U.S.C. 553(b)(B).
a policy,
in
The Board originally adopted
after notice and comment, to implement an annual fee of
48 basis points
(equivalent to 20 basis points for a 10-hour
Fedwire day) on April 13, 1995.
The Board's action today will
reduce the previously announced 1995 fee to an annual rate of
36 basis points
(equivalent to 15 basis points for a 10-hour
-
Fedwire day.)
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Because the Board's action reduces burden on
affected institutions compared to the previously announced
policy, the Board believes that seeking additional comment on
this action is unnecessary.
VII. Policy Statement
The Board has adopted the following change in its
policy statement that will replace paragraphs two and three of
part (I)(B)
in its "Federal Reserve Policy Statement on Payments
System Risk" under headings "I. Federal Reserve Policy" and "B.
Pricing":
The overdraft fee is 36 basis points
quoted on the basis of a 24-hour day.
(annual rate),
To obtain the daily
overdraft fee (annual rate) for the standard Fedwire operating
day, the quoted 36-basis-point fee is multiplied by the fraction
of a 24-hour day during which Fedwire is scheduled to operate.
For example, under a 10-hour scheduled Fedwire operating day, the
overdraft fee equals 15 basis points
by 10/24).
(36 basis points multiplied
The 36-basis-point fee is effective April 13, 1995.
The 36-basis-point fee (times an operating hour
fraction) will be in effect for at least two years.
A change in
the length of the scheduled Fedwire operating day would not
change the effective fee because the fee is applied to average
overdrafts which,
operating day.
in turn, would be deflated by the change in the
The Board will evaluate the desirability of an
increase in the daylight overdraft fee, based on the objectives
of the payments system risk program, two years after the
implementation of the 36-basis-point fee.
Any changes in the fee
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resulting from that review will be announced with a reasonable
lead-time for implementation.
By order of the Board of Governors of the Federal Reserve
System, March 2, 1995.
(signed) William W. Wiles
William W.Wiles,
Secretary of the Board
Self-Assessment Worksheets
3.D. Monitoring Customer Interday Payment Activity
(This section is not required in self-assessments completed prior to January 1, 1995.)
Yes
1.
a.
b.
c.
2.
3.
No
Do interday monitoring systems for ACH credit transactions
capture:
100 p e r c e n t of th e v alu e o f A C H c re d it
transactions originated by settlem ent date?
_____ ____
At least 80 percent of the value of ACH credit
transactions originated by settlem ent date?
_____ ____
Less than 80 percent of ACH credit transactions
originated by settlem ent date?
_____ ____
Do monitoring systems for ACH credit transactions pend or
reject transactions in real-tim e that would cause limits
(including collateral) to be breached for customers that have
been identified by a credit assessment to be in weak financial
condition?
Do monitoring systems track return item exposure (check and
ACH debit transactions) for financially weakened customers? _____ _____
Rating Customer Interday Payment Activity:
•
A Strong rating is appropriate if the answers to questions la, 2,
and 3 are yes.
•
A Satisfactory rating is appropriate if the answers to questions lb, 2, and 3 are
yes.
•
An Unsatisfactory rating results if the answer to question lc
answers to questions 2 or 3 are no.
is yes or the
@FedFRASER