The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
June not verify during its balance reduce at any point the day until after the close of business. One alternative add each component might be to of offline activity the credit risk and systemic exposures the Federal Reserve daylight overdrafts of E.J.Stevens is an assistant vice president and and as the potential lender of last resort. A broad range of Cleveland. The views stated here are those of in a Federal issues has emerged the author and not necessarily those of the process Bank's accounting each day, or at a predetermined time of day that approximates accounting process. a typical A difficulty periods system of the day through ample, before paying re- Defining simple, float. For ex- should credit for Reserve District banks were charged the items in another risk reduction. for brief banks might receive items in one Federal has taken the first steps toward for District. a daylight overdraft but, once defined, reduce banks' daylight over- Reserve Bank accounts. Controlling however, introduces alternative, and the one being proposed, is to define a simple minimizes intraday ing legal constraints nition. rule that float within exist- of payment recog- The result is that payments volving posted the U.S. Treasury at the opening midaftemoon, in- would be this credit risk, issues. If payments while other nonwire at the close of business. Concluding Controlling relatively first had to operate overdraft system new policy risk is a venture. within Banks daylight limits only as recently 1986. Changing their payments traffic networks, At it be- to assure that elimina- as the way banks manage during the day could its May 31, 1989 meeting, tion of direct credit risk does not create Board of Governors increased risk. Requiring Reserve systemic sharing agreements vate networks productive in domestic could risk- pri- System amendments pervision concerns the outgrowth about effective of foreign domestic networks, sibility of dollar-payment dimension among national prudent global division regulatory will be consistent making of a two-year Payment networks thorny both Federal dollar-value issue Reserve and private electronic payment when payments agents that Research Cleveland, Reserve Bank This Economic Commen- risk issues now the broad outline of those issues. • Payment System Risk carry some risk of loss. largesys- cases, law and regulation by a spe- risk in- bank prior to collection. these familiar in these networks are financed paying checks funds and the failure of a Reserve Bank lending when it is done the discount count rate, secured BULK RATE U.S. Postage P'Aid Cleveland, OH Permit No. 385 to banks window, by eligible among at the dis- Federal collat- networks, eral, to be repaid one or more days later. Less familiar is the special ing called a daylight form of lend- overdraft, when a bank's which payments in its account for some por- kind of uncollateralized label to Federal a Re- during private networks, and at no charge. In who have paid more than they have received, extended and are by those who have received more than they have paid. policy in 1986, the Board's simply required a limit on its daylight ISSN 0428-1276 banks to cover their payments. drafts (averaging daylight over- about $120 billion loans from the Federal each bank to set overdrafts (in- with the telecommunications paying payment means absorbs bank in daylight that the all risk that a overdraft fail at the end of the day. Private dollar-payment networks overdraft risk-absorber feature, now subject signment will large- but no compay- nor are they to any well-defined law or regulation. markets, sion in volume of banking and the explo- of financial tivity, especially market for overnight ac- financing. Banking practices increasingly to rely on free Federal daylight credit. Introduction time accounting banks systems in managing exposures Reserve came Reserve of real- assisted some their own daylight in this environment. accounting systems Federal operate on basis only in monitoring banks and some specialized In general, Banks do not prevent drafts, but, since trol daylight credit Federal Reserve daylight over- 1986, attempt risk-as- The risk involved with daylight credit is that, at the end of a day, a paying bank might be unable light overdraft to repay its day- either at a Federal serve Bank or on a private in- to con- risk exposures. have a because ments are not irrevocable, the globalization and securities Irrevocable Reserve mush- nection stitutions. Federal volumes over the past 20 years, in con- Reserve. daylight initial overdraft roomed a real-time parable Starting to receiving banks have insuffi- In effect, the resulting Daylight problem such net debits repre- sent loans to participants Material may be reprinted provided that the source is credited. Please send copies of reprinted materials to the editor. cient balances sovereign bank-regulatory agents, all the way to the basic operational question of how to define a real-time daylight overdraft that includes offline activities. about immediate, the course of a single banking day, automatically, Ohio 44101 credits to the Reserve (totaling $600 billion daily) provide irrevocable uniform On Federal payments daily) represent serve Bank loan, made and to be repaid of Cleveland, P.O. Box 6387, is neither nor acceptable even when paying exceed tion of the day. This net debit creates payments Reserve. times-interrelated issues. These range from how to devise a workable international division of labor among revolution, in large-dollar-value networks An effective payment system risk policy must deal with complex, some- In to deal with their eyes open to risk. electronic - long-established allow counterparties Risk assignment Requested: Department, recognized. sufficient competition. the balance The Federal system cial form of lending. with both fair and occurs mailing in risk issues arise in tems. Risk exists of labor Cleveland, OH 44101 Please send corrected by the broad range of payment All payments system systems). issues the risks created payments. through Address Correction examina- and operational is suggested tary examines set of internation- in reducing is most familiar PO. Box 6387 are policy Cash risks counterfeit; This adds a new to the already of an international in and the pos- Federal Federal Reserve Bank of Cleveland Research Department or proposed traffic shift- offshore must be addressed. al, domestic, involved participants private su- its ex- system risk policy. The adopted net debits on private The need for a more fully articulated of the Federal tion of the interrelated However, eluding the began amending isting payment limit this counter- transformation. ing to unregulated Comments payment necessary J. Stevens by E. of the day, or in items would be posted • comes Payment System Risk Issues new and more were to shift to private Another is not pricing drafts of their Federal complicated Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. with this is that it could add or absorb serves to the banking Reserve as the Federal Federal Reserve Bank of Cleveland economist at the Federal Reserve Bank of either as soon as it has been determined Reserve eCONOMIC COMMeNTORY risk now faces in its roles as a provider IS, 1989 Re- network. This would mean that the bank had failed, leaving the Federal Reserve or covering any illiquidity of banks in a Introducing this sort of settlement draft position during a day for monitor- lowing nontransferred securities to be lending between overnight interbank participants in a private network holding an uncollateralized debt of the resulting unexpected net debit position. ing purposes, with counseling of those banks that exceed their limits, used as collateral in protecting against direct credit risk. failed bank. A common presumption has been that the Federal Reserve would intervene in the event of a CHIPS settlement guarantee has two important implications. One is that participants may change their procedures for making and settling payments in order to avoid loans. A high enough fee would make it cheaper for banks to adopt alternative methods of financing. Fedwire daylight overdraft limits were lowered in 1988, in line with the initial • Payment system risk policy has twin concems. One is the direct credit risk exposure of Federal Reserve Banks. The other is potential systemic risk on private payment systems. Systemic risk failure, providing banks with the funds needed to assure settlement. Whether and under what circumstances foreign central banks should accept respon- refers to the possibility that the unexpected failure of one bank on a private system to complete its payments would prevent counterparty banks from meet- sibility for lending to CHIPS participants subsidiary to their nations' banks is an open question, if only for the practical problem of operating in different ing their own obligations, that some of their counterparties in tum would be unable to pay, and so on in a complex chain of payment failures that might time zones. disrupt the entire financial system. • International Issues Putting aside domestic payments for the moment, international dollar payment system risk issues involve both onshore and offshore privately operated networks that transfer dollars between domestic and/or foreignrelated banking institutions. Participants accumulate net credit or debit positions as payments clear during the day. At the end of the day, net debit positions are paid from Federal Reserve Bank deposits (directly or via correspondents) and are redistributed to participants in net credit positions. The Clearing House Interbank Payments System (CHIPS), operated by the New York Clearing House, is the onshore example of such a network for multilateral position netting. The Chase-Tokyo Clearing is an offshore example. Systemic risk is the central regulatory concem in these private networks. Using current CHIPS as an example, total payments of about $700 billion are made through CHIPS each day, involving an average $45 billion peak daylight overdraft exposure of net creditposition banks to net debit-position banks. CHIPS agreements among participants don't protect against systemic risk: a defaulting participant's payments and receipts are to be backed-out of the day's transactions, and a new settlement struck, but with no mechanism for In any case, moral hazard implications should make the presumption of rescue unacceptable to the Federal Reserve, whether implicit or explicit. That is, if the Federal Reserve could be counted on to mount a rescue, the probability of needing a rescue would increase as the market discipline of counterparty credit scrutiny eroded. Which nation's authorities are responsible in payment systems with multina. tional participants is an issue that is only beginning to receive attention, partly instigated by the larger regulatory issues of host country versus country of residence questions arising in banking. Which authorities should be concerned with dollar payment networks operating offshore, and for dollar payment system activities of foreign banking institutions participating in onshore networks are complicated issues. The central banks of the 10 major developed nations, the G-l 0, are currently exploring these issues, with the assistance of the Bank for International Settlements (BIS). The Federal Reserve has been urging, and CHIPS has now agreed to adopt, internal guarantees of shared funding by all network participants in the event that any participant is unable to cover its deficit position on the network at the end of a day. This would reduce or eliminate systemic risk by assuring settlement without a chain-reaction of failures. responsibility for weaker members of CHIPS. For example, if guarantees of shared funding are required of all onshore private payment networks, offshore networks may become more attractive. Or pairs of banks may simply bypass multibank networks: FXNET has emerged recently, offering an electronic system through which pairs of banks with a large volume of payments back and forth can make and set- policy intention to reduce System daylight credit risk exposure gradually over time. At the same time, the Federal Reserve Board of Governors initiated a thorough review of its payment system risk policy, with particular attention to the possibility of replacing or augmenting quantity limits with some form of daylight overdraft pricing, discussed below. tle those payments directly. The second important implication of a CHIPS risk-sharing agreement is that the Federal Reserve can toughen requirements for users of its own networks because of the reduced concem that removing direct credit risk might simply add to systemic risk. This might be the result if users of Federal Reserve networks could avoid their risk controls by moving payments traffic to private networks with less constraining controls . • Domestic Issues The Federal Reserve in effect operates two large-dollar-value electronic payment networks, Fedwire and the securities wire. Fedwire simply transfers reserve deposits between banks as they send payments. A common transaction would be one in which the corporate customer of one bank instructs it to pay the corporate customer of another bank. But the lion's share of the dollar value of payments arises from interbank overnight federal funds lending and repayment, and from trading in securities markets. The securities wire transfers U.S. Government securities in book-entry form against payment from reserve deposits, reflecting transactions involving U.S. Government securities, Daylight overdrafts originating on Fedwire became subject to a generally nOI1constraining upper limit in 1986. Each user has a self-determined daylight overdraft limit, calculated within Federal Reserve guidelines. The Federal Reserve Banks record each bank's daylight over- Daylight overdrafts originating on the securities wire have not been subject to any explicit limitations. Reducing daylight overdrafts from this source is made difficult by their concentration at a handful of banks intimately involved in the clearing and settlement of most daily trading in U.S. Government securities, The paramount issue here is whether to treat daylight overdrafts from this source on a par with those on Fedwire, or to develop a policy that accommodates them. The latter alternative would minimize potential disruption of the U.S. Government securities market, although it could discourage development of private book-entry systems. Collateralization of overdrafts with the securities being transferred would reduce Federal Reserve risk exposure, but acquiring a perfected interest in the securities is not always possible. The Federal Reserve Board of Governors has concluded that it will combine overdrafts originating from funds transfers and securities transfers into a single total, subject to a quantitative limit. While an overdraft originating from funds transfers alone will not be allowed to exceed the limit, an excess originating from securities transfers can exceed the limit provided that the entire overdraft is collateralized by some combination of securities being transferred and other acceptable collateral. This avoids disruption of the Government-securities market by al- Pricing Daylight Overdrafts How to price daylight overdrafts on the Federal Reserve networks was one issue that emerged in recent System staff studies. Initially, three proposals gained attention. One was Federal Reserve Governor Wayne Angell's suggestion that banks borrow the amount of any daylight overdraft as a collateralized loan from the discount window at a penalty rate. In conjunction with the further proposal that the System pay a below-market rate of interest on excess reserves, the Angell proposal amounted to a stick and a carrot that would induce banks to hold sufficient excess reserves to avoid daylight overdrafts. A second proposal, originating with the Federal Reserve Bank of New York, would have had banks hold interest earning supplemental reserve balances in proportion to their daylight overdrafts. This would have required banks to hold more excess reserves directly, but not necessarily by enough to eliminate daylight overdrafts completely. The third proposal, and the one that the Board of Governors has published for public comment, simply would phase in a slight fee of a quarter of one percent at an annual rate on the average daily overdraft position of a bank in excess of a deductible. For example, a very large bank with a $1 billion daily average overdraft in excess of the deductible would pay $6,850 per business day, or $1.8 million per year. How high this another major duce payment that it induces price should be is issue. Pricing can resystem risk to the extent banks to make risk- reducing changes in their payment practices, For example, many banks that borrow overnight federal funds go into daylight overdraft when they repay at the beginning of the next day. They then reborrow from identical sources toward the end of the day. A large share of daylight overdrafts represents this Federal Reserve daylight bridge- One alternative, expected to gain widespread use, is for borrowing banks to repay only the net difference, if any, between the amount borrowed from another institution on successive days. The balance would be held as a repeated overnight loan on terms renegotiated daily. The fee would be effective not because banks paid it, but because they avoided paying it by reducing dependence on daylight credit. For another example, banks might switch payments to existing or newly formed private payment networks that. under the Board's policy, must include arrangements for assuring settlement finality. The fee would be effective in reducing direct credit risk of the Federal Reserve, while risk-sharing agreements like those about to be introduced in CHIPS would protect against increased systemic risk. • An Operational Issue Developing a long-run Federal Reserve payment system risk reduction program requires a robust definition of a daylight overdraft. To be operational, the definition must allow banks to monitor their daylight overdraft positions on a realtime basis during the day. The issue is how a daylight overdraft monitor should incorporate credits and debits to a bank's balance from offline activities such as check clearing, currency shipments, ACH payments, Treasury items, etc. Rules applicable to these activities only specify the day, not the time of day, on which funds are available. Currently, the System's ex-post daylight overdraft monitor adds the net amount of almost all of these offline activities to the monitor as a single daily adjustment. The adjustment is to the opening balance, if a net credit, or to the closing balance, if a net debit. The current procedure cannot continue, if banks are expected to pay for daylight overdrafts, because a bank could failed, leaving the Federal Reserve or covering any illiquidity of banks in a Introducing this sort of settlement draft position during a day for monitor- lowing nontransferred securities to be lending between overnight interbank participants in a private network holding an uncollateralized debt of the resulting unexpected net debit position. ing purposes, with counseling of those banks that exceed their limits, used as collateral in protecting against direct credit risk. failed bank. A common presumption has been that the Federal Reserve would intervene in the event of a CHIPS settlement guarantee has two important implications. One is that participants may change their procedures for making and settling payments in order to avoid loans. A high enough fee would make it cheaper for banks to adopt alternative methods of financing. Fedwire daylight overdraft limits were lowered in 1988, in line with the initial • Payment system risk policy has twin concems. One is the direct credit risk exposure of Federal Reserve Banks. The other is potential systemic risk on private payment systems. Systemic risk failure, providing banks with the funds needed to assure settlement. Whether and under what circumstances foreign central banks should accept respon- refers to the possibility that the unexpected failure of one bank on a private system to complete its payments would prevent counterparty banks from meet- sibility for lending to CHIPS participants subsidiary to their nations' banks is an open question, if only for the practical problem of operating in different ing their own obligations, that some of their counterparties in tum would be unable to pay, and so on in a complex chain of payment failures that might time zones. disrupt the entire financial system. • International Issues Putting aside domestic payments for the moment, international dollar payment system risk issues involve both onshore and offshore privately operated networks that transfer dollars between domestic and/or foreignrelated banking institutions. Participants accumulate net credit or debit positions as payments clear during the day. At the end of the day, net debit positions are paid from Federal Reserve Bank deposits (directly or via correspondents) and are redistributed to participants in net credit positions. The Clearing House Interbank Payments System (CHIPS), operated by the New York Clearing House, is the onshore example of such a network for multilateral position netting. The Chase-Tokyo Clearing is an offshore example. Systemic risk is the central regulatory concem in these private networks. Using current CHIPS as an example, total payments of about $700 billion are made through CHIPS each day, involving an average $45 billion peak daylight overdraft exposure of net creditposition banks to net debit-position banks. CHIPS agreements among participants don't protect against systemic risk: a defaulting participant's payments and receipts are to be backed-out of the day's transactions, and a new settlement struck, but with no mechanism for In any case, moral hazard implications should make the presumption of rescue unacceptable to the Federal Reserve, whether implicit or explicit. That is, if the Federal Reserve could be counted on to mount a rescue, the probability of needing a rescue would increase as the market discipline of counterparty credit scrutiny eroded. Which nation's authorities are responsible in payment systems with multina. tional participants is an issue that is only beginning to receive attention, partly instigated by the larger regulatory issues of host country versus country of residence questions arising in banking. Which authorities should be concerned with dollar payment networks operating offshore, and for dollar payment system activities of foreign banking institutions participating in onshore networks are complicated issues. The central banks of the 10 major developed nations, the G-l 0, are currently exploring these issues, with the assistance of the Bank for International Settlements (BIS). The Federal Reserve has been urging, and CHIPS has now agreed to adopt, internal guarantees of shared funding by all network participants in the event that any participant is unable to cover its deficit position on the network at the end of a day. This would reduce or eliminate systemic risk by assuring settlement without a chain-reaction of failures. responsibility for weaker members of CHIPS. For example, if guarantees of shared funding are required of all onshore private payment networks, offshore networks may become more attractive. Or pairs of banks may simply bypass multibank networks: FXNET has emerged recently, offering an electronic system through which pairs of banks with a large volume of payments back and forth can make and set- policy intention to reduce System daylight credit risk exposure gradually over time. At the same time, the Federal Reserve Board of Governors initiated a thorough review of its payment system risk policy, with particular attention to the possibility of replacing or augmenting quantity limits with some form of daylight overdraft pricing, discussed below. tle those payments directly. The second important implication of a CHIPS risk-sharing agreement is that the Federal Reserve can toughen requirements for users of its own networks because of the reduced concem that removing direct credit risk might simply add to systemic risk. This might be the result if users of Federal Reserve networks could avoid their risk controls by moving payments traffic to private networks with less constraining controls . • Domestic Issues The Federal Reserve in effect operates two large-dollar-value electronic payment networks, Fedwire and the securities wire. Fedwire simply transfers reserve deposits between banks as they send payments. A common transaction would be one in which the corporate customer of one bank instructs it to pay the corporate customer of another bank. But the lion's share of the dollar value of payments arises from interbank overnight federal funds lending and repayment, and from trading in securities markets. The securities wire transfers U.S. Government securities in book-entry form against payment from reserve deposits, reflecting transactions involving U.S. Government securities, Daylight overdrafts originating on Fedwire became subject to a generally nOI1constraining upper limit in 1986. Each user has a self-determined daylight overdraft limit, calculated within Federal Reserve guidelines. The Federal Reserve Banks record each bank's daylight over- Daylight overdrafts originating on the securities wire have not been subject to any explicit limitations. Reducing daylight overdrafts from this source is made difficult by their concentration at a handful of banks intimately involved in the clearing and settlement of most daily trading in U.S. Government securities, The paramount issue here is whether to treat daylight overdrafts from this source on a par with those on Fedwire, or to develop a policy that accommodates them. The latter alternative would minimize potential disruption of the U.S. Government securities market, although it could discourage development of private book-entry systems. Collateralization of overdrafts with the securities being transferred would reduce Federal Reserve risk exposure, but acquiring a perfected interest in the securities is not always possible. The Federal Reserve Board of Governors has concluded that it will combine overdrafts originating from funds transfers and securities transfers into a single total, subject to a quantitative limit. While an overdraft originating from funds transfers alone will not be allowed to exceed the limit, an excess originating from securities transfers can exceed the limit provided that the entire overdraft is collateralized by some combination of securities being transferred and other acceptable collateral. This avoids disruption of the Government-securities market by al- Pricing Daylight Overdrafts How to price daylight overdrafts on the Federal Reserve networks was one issue that emerged in recent System staff studies. Initially, three proposals gained attention. One was Federal Reserve Governor Wayne Angell's suggestion that banks borrow the amount of any daylight overdraft as a collateralized loan from the discount window at a penalty rate. In conjunction with the further proposal that the System pay a below-market rate of interest on excess reserves, the Angell proposal amounted to a stick and a carrot that would induce banks to hold sufficient excess reserves to avoid daylight overdrafts. A second proposal, originating with the Federal Reserve Bank of New York, would have had banks hold interest earning supplemental reserve balances in proportion to their daylight overdrafts. This would have required banks to hold more excess reserves directly, but not necessarily by enough to eliminate daylight overdrafts completely. The third proposal, and the one that the Board of Governors has published for public comment, simply would phase in a slight fee of a quarter of one percent at an annual rate on the average daily overdraft position of a bank in excess of a deductible. For example, a very large bank with a $1 billion daily average overdraft in excess of the deductible would pay $6,850 per business day, or $1.8 million per year. How high this another major duce payment that it induces price should be is issue. Pricing can resystem risk to the extent banks to make risk- reducing changes in their payment practices, For example, many banks that borrow overnight federal funds go into daylight overdraft when they repay at the beginning of the next day. They then reborrow from identical sources toward the end of the day. A large share of daylight overdrafts represents this Federal Reserve daylight bridge- One alternative, expected to gain widespread use, is for borrowing banks to repay only the net difference, if any, between the amount borrowed from another institution on successive days. The balance would be held as a repeated overnight loan on terms renegotiated daily. The fee would be effective not because banks paid it, but because they avoided paying it by reducing dependence on daylight credit. For another example, banks might switch payments to existing or newly formed private payment networks that. under the Board's policy, must include arrangements for assuring settlement finality. The fee would be effective in reducing direct credit risk of the Federal Reserve, while risk-sharing agreements like those about to be introduced in CHIPS would protect against increased systemic risk. • An Operational Issue Developing a long-run Federal Reserve payment system risk reduction program requires a robust definition of a daylight overdraft. To be operational, the definition must allow banks to monitor their daylight overdraft positions on a realtime basis during the day. The issue is how a daylight overdraft monitor should incorporate credits and debits to a bank's balance from offline activities such as check clearing, currency shipments, ACH payments, Treasury items, etc. Rules applicable to these activities only specify the day, not the time of day, on which funds are available. Currently, the System's ex-post daylight overdraft monitor adds the net amount of almost all of these offline activities to the monitor as a single daily adjustment. The adjustment is to the opening balance, if a net credit, or to the closing balance, if a net debit. The current procedure cannot continue, if banks are expected to pay for daylight overdrafts, because a bank could June not verify during its balance reduce at any point the day until after the close of business. One alternative add each component might be to of offline activity the credit risk and systemic exposures the Federal Reserve daylight overdrafts of E.J.Stevens is an assistant vice president and and as the potential lender of last resort. A broad range of Cleveland. The views stated here are those of in a Federal issues has emerged the author and not necessarily those of the process Bank's accounting each day, or at a predetermined time of day that approximates accounting process. a typical A difficulty periods system of the day through ample, before paying re- Defining simple, float. For ex- should credit for Reserve District banks were charged the items in another risk reduction. for brief banks might receive items in one Federal has taken the first steps toward for District. a daylight overdraft but, once defined, reduce banks' daylight over- Reserve Bank accounts. Controlling however, introduces alternative, and the one being proposed, is to define a simple minimizes intraday ing legal constraints nition. rule that float within exist- of payment recog- The result is that payments volving posted the U.S. Treasury at the opening midaftemoon, in- would be this credit risk, issues. If payments while other nonwire at the close of business. Concluding Controlling relatively first had to operate overdraft system new policy risk is a venture. within Banks daylight limits only as recently 1986. Changing their payments traffic networks, At it be- to assure that elimina- as the way banks manage during the day could its May 31, 1989 meeting, tion of direct credit risk does not create Board of Governors increased risk. Requiring Reserve systemic sharing agreements vate networks productive in domestic could risk- pri- System amendments pervision concerns the outgrowth about effective of foreign domestic networks, sibility of dollar-payment dimension among national prudent global division regulatory will be consistent making of a two-year Payment networks thorny both Federal dollar-value issue Reserve and private electronic payment when payments agents that Research Cleveland, Reserve Bank This Economic Commen- risk issues now the broad outline of those issues. • Payment System Risk carry some risk of loss. largesys- cases, law and regulation by a spe- risk in- bank prior to collection. these familiar in these networks are financed paying checks funds and the failure of a Reserve Bank lending when it is done the discount count rate, secured BULK RATE U.S. Postage P'Aid Cleveland, OH Permit No. 385 to banks window, by eligible among at the dis- Federal collat- networks, eral, to be repaid one or more days later. Less familiar is the special ing called a daylight form of lend- overdraft, when a bank's which payments in its account for some por- kind of uncollateralized label to Federal a Re- during private networks, and at no charge. In who have paid more than they have received, extended and are by those who have received more than they have paid. policy in 1986, the Board's simply required a limit on its daylight ISSN 0428-1276 banks to cover their payments. drafts (averaging daylight over- about $120 billion loans from the Federal each bank to set overdrafts (in- with the telecommunications paying payment means absorbs bank in daylight that the all risk that a overdraft fail at the end of the day. Private dollar-payment networks overdraft risk-absorber feature, now subject signment will large- but no compay- nor are they to any well-defined law or regulation. markets, sion in volume of banking and the explo- of financial tivity, especially market for overnight ac- financing. Banking practices increasingly to rely on free Federal daylight credit. Introduction time accounting banks systems in managing exposures Reserve came Reserve of real- assisted some their own daylight in this environment. accounting systems Federal operate on basis only in monitoring banks and some specialized In general, Banks do not prevent drafts, but, since trol daylight credit Federal Reserve daylight over- 1986, attempt risk-as- The risk involved with daylight credit is that, at the end of a day, a paying bank might be unable light overdraft to repay its day- either at a Federal serve Bank or on a private in- to con- risk exposures. have a because ments are not irrevocable, the globalization and securities Irrevocable Reserve mush- nection stitutions. Federal volumes over the past 20 years, in con- Reserve. daylight initial overdraft roomed a real-time parable Starting to receiving banks have insuffi- In effect, the resulting Daylight problem such net debits repre- sent loans to participants Material may be reprinted provided that the source is credited. Please send copies of reprinted materials to the editor. cient balances sovereign bank-regulatory agents, all the way to the basic operational question of how to define a real-time daylight overdraft that includes offline activities. about immediate, the course of a single banking day, automatically, Ohio 44101 credits to the Reserve (totaling $600 billion daily) provide irrevocable uniform On Federal payments daily) represent serve Bank loan, made and to be repaid of Cleveland, P.O. Box 6387, is neither nor acceptable even when paying exceed tion of the day. This net debit creates payments Reserve. times-interrelated issues. These range from how to devise a workable international division of labor among revolution, in large-dollar-value networks An effective payment system risk policy must deal with complex, some- In to deal with their eyes open to risk. electronic - long-established allow counterparties Risk assignment Requested: Department, recognized. sufficient competition. the balance The Federal system cial form of lending. with both fair and occurs mailing in risk issues arise in tems. Risk exists of labor Cleveland, OH 44101 Please send corrected by the broad range of payment All payments system systems). issues the risks created payments. through Address Correction examina- and operational is suggested tary examines set of internation- in reducing is most familiar PO. Box 6387 are policy Cash risks counterfeit; This adds a new to the already of an international in and the pos- Federal Federal Reserve Bank of Cleveland Research Department or proposed traffic shift- offshore must be addressed. al, domestic, involved participants private su- its ex- system risk policy. The adopted net debits on private The need for a more fully articulated of the Federal tion of the interrelated However, eluding the began amending isting payment limit this counter- transformation. ing to unregulated Comments payment necessary J. Stevens by E. of the day, or in items would be posted • comes Payment System Risk Issues new and more were to shift to private Another is not pricing drafts of their Federal complicated Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve System. with this is that it could add or absorb serves to the banking Reserve as the Federal Federal Reserve Bank of Cleveland economist at the Federal Reserve Bank of either as soon as it has been determined Reserve eCONOMIC COMMeNTORY risk now faces in its roles as a provider IS, 1989 Re- network. This would mean that the bank had
@FedFRASER