Full text of Federal Reserve Bank of New York Circulars : 10654. Payments System Risk Reduction

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FEDERAL RESERVE BANK
OF NEW YORK

[

Circular No. 10654 ~|
September 1, 1993

J

PAYMENTS SYSTEM RISK REDUCTION
Comments Invited on Proposed Daylight Overdraft Penalty Fee and
Proposed Modifications to the Policy Statement on Payments System Risk

To All Depository Institutions, and Others
Concerned, in the Second Federal Reserve District:

The Board of Governors of the Federal Reserve System is seeking comment on the rate at which Federal Reserve
Banks will assess a penalty fee on the average daylight overdrafts of bankers’ banks, Edge and agreement
corporations, and limited-purpose trust companies. C o m m e n ts on th e p r o p o s e d p e n a l t y f e e s h o u ld b e s u b m itte d b y
S e p te m b e r 2 4 , 1 9 9 3 .

The Board of Governors has also requested comment on proposed modifications to its Policy Statement on
Payments System Risk. The changes would (a) modify the procedures that depository institutions must use if they
choose to complete a self-assessment to establish a daylight overdraft net debit cap, and (b) eliminate the requirement
that U.S. branches and agencies of foreign banks provide information on U.S. funding capability and discountwindow eligible collateral for use in determining their daylight overdraft net debit cap. C o m m e n ts on th e p r o p o s e d
m o d if ic a tio n s to th e P o lic y S ta te m e n t sh o u ld b e s u b m itte d b y O c to b e r 8 , 1 9 9 3 .

In this connection, the Board has prepared a draft revision of its G u id e to th e F e d e r a l R e s e r v e s P a y m e n ts S y s te m
R is k P o lic y , which includes a full description of the proposed new self-assessment procedures. Our Accounting

Department will send a copy of the draft G u id e to its daylight overdraft contacts at all depository institutions in
this District that currently have self-assessed net debit caps. Others may obtain a copy from Paula Ferrara of that
Department (Tel. No. 212-720-7767).
Printed below and on the following pages are the texts of the Board’s official notices on these proposals, as
printed in the F e d e r a l R e g is te r of August 24, 1993. Questions on these matters may be directed to Don Anderson,
Manager, Accounting Department (Tel. No. 212-720-5250), or to Anthony Fressola, Chief, Accounting Control
Division (Tel. No. 212-720-5803).
W

il l ia m

J. M

cD o n o u g h

P r e s id e n t.

FED ERAL RESERVE SYSTEM
[Docket No. R-0693]
Proposed Modification of the
Payments System Risk Policy;
Bankers’ Banks, Edge Corporations,
and Limited-Purpose Trust Companies

Board of G overnors of the
F ederal Reserve System .
ACTION: Request for com m ent.
AGENCY:

SUMMARY: The Board is seeking
co m m ent on th e rate at w h ich Federal
Reserve Banks w ill assess a p e n a lty fee
on th e average daily daylight overdrafts




of b an k e rs’ b an k s th at do not m aintain
reserves, Edge an d agreem ent
corporations, an d lim ited -p u rp o se trust
com panies. T he Board p roposes to
assess th e daylight overdraft p en alty fee
at a rate eq u al to th e federal funds rate
plu s th e overnight overdraft p enalty
rate, q uo ted on a 24-hour basis, for a
360-day year, an d ad ju sted for th e
length of th e F ed w ire operating day.
T he p en a lty fee sh o u ld create an
in ce n tiv e for in stitu tio n s that do not
have regular d isco u n t w in d o w a cc ess to
avoid incurring d ay lig h t overdrafts in
Federal R eserve a cco u n ts.

C om m ents m u st be su b m itted on
or before S eptem ber 2 4 ,1 9 9 3 .
DATES:

C om m ents, w h ich sh o u ld
refer to D ocket No. R -0693, m ay be
m ailed to Mr. W illiam W. W iles,
S ecretary, Board o f G overnors of th e
F ederal R eserve S ystem , 20th S treet an d
C o n stitu tio n A venue, NW ., W ashington,
DG 20551. C om m ents ad d ressed to M r.
W iles also m ay be d eliv ered to th e
B oard’s m ail room b etw een 8:45 a.m .
an d 5:15 p.m . an d to th e secu rity co n tro l
room o u tsid e o f th o se h o urs. Both th e
m ail room a n d th e secu rity co n tro l room
are accessible from th e co u rty ard
en tran ce o n 2 0th S treet betw een
C o n stitu tio n A v en u e a n d C S treet, NW.
C om m ents m ay be in sp e cted in room B 1122 betw een 9 a.m . an d 5 p.m .
ADDRESSES:

Federal Register / Vol. 58, No. 162 / Tuesday, August 24, 1993 / Notices
FOR FURTHER INFORMATION CONTACT;

O liver I. Ireland, A ssociate General
C ounsel (202/452-3625) or Stephanie
M artin, S enior A ttorney (202/4523198), Legal D ivision; Paul Bettge,
M anager (202/452-3174), D ivision of
Reserve Bank O perations and Paym ent
System s; for the hearing im paired only:
T elecom m unications Device for the
Deaf, D orothea T hom pson (202/4523544).
SUPPLEMENTARY INFORMATION: In May
1990, th e Board requested com m ent on
m odifications to its paym ents system
risk policy that w ould assess penalty
fees for daylight overdrafts in Federal
Reserve accounts incurred by
in stitu tio n s that do not have regular
d isco u n t w indow access. T hese
institutions include Edge and agreem ent
corporations.1 and bankers’ b a n k s*2*that
do not m aintain reserves, such as
corporate credit unions. T he purposes of
th e proposed m odifications w ere
tw ofold: First, the proposal w ould
provide an incentive for in stitutions
w ithout discount w indow access to
refrain from incurring daylight
overdrafts. T his w ould help Federal
Reserve Banks to avoid situations w here
they m ay face the possibility of
extending overnight credit w hen such
an in stitu tio n is unable to cover a
daylight overdraft by the end of the
business day. Second, for bankers’
banks that do not m aintain reserves, the
proposal w ould reflect the quid pro quo
for disco u n t w indow access established
in the M onetary Control A ct of 1980.

Background
U nder the B oard’s current daylight
overdraft policy, m ost depository
institutions m ay in c u r daylight
overdrafts’in th eir accounts at Reserve
Banks up to a m axim um , or cap, that is
a m ultip le of th e ir risk-based capital. If
a depository institution incurs frequent
and m aterial daylight overdrafts in
excess of its cap due to book-entry
securities transactions over Fedw ire, the
in stitu tio n m ust collateralize its entire
book-0ntry-related overdraft on an
ongoing basis. Effective A pril 14,1994,
• Edge corporations are organized under section
25A of the Federal Reserve Act (12 U.S.C. 611-631).
Agreement corporations have an agreement or
undertaking with the Board under section 25 of the
Federal Reserve Act (12 U.S.C. 601-604a). For the
purposes of this docket, the term "Edge
corporation" includes both Edge and agreement
corporations.
2 A bankers’ bank is a financial institution that is
not required to m aintain reserves under the Board’s
Regulation D (12 CFR part 204) because it is
organized solely to d o business w ith other financial
institutions, is owned primarily by the financial
institutions w ith w hich it does business, and does
not do business with the general public. A bankers'
bank is npt a depository institution as defined in
the Board’s Regulation A (12 CFR 201.2(a)).




the Reserve Banks w ill assess a fee on
average daily daylight overdrafts.
If an in stitu tio n tails to cover a
daylight overdraft by th e close of the
b usin ess day, it m ay eith er obtain a
d isco u n t w in d o w loan (if it has access
to th e d isco u n t w indow ) or carry the
overdraft overnight. If an institution
incu rs a n overnight overdraft, the
Reserve Bank charges a penalty fee (the
higher of 10 percent or the federal funds
rate p lu s 2 percent (annual rate)),3 and
the in stitu tio n m ust m ake up for any
reserve or clearing account deficiency
by su bsequently holding additional
overnight balances equal to the
overdraft.
T he Federal Reserve Act exem pts
b an k ers’ banks from reserve
req u irem en ts,4 and Regulation A
exp licitly excludes ban k ers’ banks from
regular d isco u n t w indow access.5
N evertheless, th e Board has perm itted
b an k e rs’ banks to have access to the
d isco u n t w in d o w if they choose to
m ain tain reserves voluntarily. Bankers’
banks th at choose to m aintain reserves
v o lu n tarily may establish a n ap and
in cu r daylight overdrafts u n d e r the
pay m en ts system risk policy to the sam e
extent as depository institutions.
G enerally, b an k ers’ banks for
com m ercial banks have chosen to
becom e m em ber banks an d to m aintain
reserves. They have m ade th is choice
because section 19(e) of th e Federal
Reserve A ct provides th at a m em ber
bank m ay d ep o sit only 10 percent of
paid -u p capital an d su rp lu s in an
in stitu tio n other th an a depository
in stitu tio n eligible for d isco u n t w indow
advances. M ost corporate credit u nions
have chosen n ot to m ain tain reserves
and th u s do not have th e option of
covering an overdraft w ith a discount
w in d o w loan.
T he Federal Reserve has long been
con cern ed th at bankers’ banks th at do
not m ain tain reserves an d are unable to
borrow at th e d isco u n t w in d o w may
nev erth eless in c u r overnight overdrafts.
To ad d ress th e risks arising from such
overdrafts an d to avoid th e extension of
overnight credit to in stitu tio n s w ith no
d isc o u n t w in d o w access, cu rren t policy
provides th at these b an k ers’ banks
sh o u ld refrain from incurring daylight
overdrafts. If such in stitu tio n s do in cu r
daylight overdrafts, how ever, they are
req u ired to collateralize th e overdrafts.
3The overnight overdraft penalty fee is assessed
on the negative overnight balance as a penalty for
poor reserve management and is not related to the
length of tim e the overdraft exists. The “regular”
daylight overdraft fee, effective in April 1994,
incorporates a factor to account for the length of the
Fedwire operating day.
* 12 U.S.C. 461(b)(9).
* 12 C.F.R. 201.2(a)(2).

44673

Edge corporations are subject to
reserve requirem ents, b u t do n o t have
access to th e disco u n t w in d o w on th e
sam e basis as depository in stitu tio n s.
Instead, Edge corp o ratio n s generally are
funded by th eir parent depository
in stitu tio n s, w hich have d isco u n t
w in d o w access. C urrent policy perm its
Edge corporations to establish a cap an d
to in cu r overdrafts w ith in th a t cap,
p rovided that they post collateral for th e
overdrafts. Edge corporations also may
in cu r book-entry secu rities overdrafts
above th e ir cap, p rovided th e overdrafts
are collateralized.

Board’s 1990 Proposal
U nder th e 1990 proposal, ban k ers’
banks th at d id not m ain tain reserves
an d Edge corporations w o u ld have been
expected to pre-fund th e ir fu n d s and
book-entry securities activity. The
proposal w ould have treated th e use of
in trad ay credit in the form of daylight
overdrafts m uch like th e use of
overnight credit in th e form of overnight
overdrafts. U nder the proposal, Reserve
Banks, absent u n u su al circum stances,
w o u ld have charged b an k ers’ banks th at
do n ot m ain tain reserves an d Edge
corporations an am ount equal to th e
overnight overdraft penalty fee, levied
against th e m axim um daylight overdraft
for th e day. If the daylight overdraft
w ere n ot fully rep aid by th e en d of th e
day, th e in stitu tio n w o u ld have
co n tin u ed to be subject to th e overnight
pen alty fee and th e req u irem en t to h o ld
excess reserve or clearing account
b alances on a subsequent night.
Policy A d o p ted b y Board
T he Board has ad opted a m odified
version of the proposed policy, b u t has
d eterm in ed to seek further com m ent on
th e rate at w h ich the d aylight overdraft
p en alty fee w ill be assessed. T he policy
ad o p ted by the Board p ro v id es th at th e
daylight overdraft pen alty fee w ill be
levied on th e daily average, rath er th an
m axim um , daylight overdraft of
in stitu tio n s that do not have regular
d isco u n t w in d o w access. T he daylight
overdraft penalty fee w ill ap p ly to
lim ited -p u rp o se tru st co m p an ies as w ell
as b an k ers’ banks th at do n o t m ain tain
reserves an d Edge corporations. T he
Board w ill co n tinue to req u ire th at, in
th e event a b an k ers’ b an k or Edge
corporation in cu rs a day lig h t overdraft,
th e overdraft sh o u ld be co llateralized .6
6 As these institutions may not norm ally m aintain
collateral pledged to the Federal Reserve on an
ongoing basis, if a bankers’ bank or Edge
corporation incurs a daylight overdraft the Reserve
Bank generally requests a pledge of collateral (that
would be eligible collateral for a discount window
loan) for an appropriate period.

44674

Federal Register / VoL 58, No. 162 / Tuesday, August 24, 1993 / Notices

As proposed in 1990, th e overnight
penalty rate and excess balance
requirem ents w ill contin u e to ap p ly to
overnight overdrafts incu rred by these
institutions. Reserve Banks w ill have
the ability to w aive the daylight and
overnight charges, as w ell as th e holding
of excess balances if, for exam ple, the
overdraft resulted from a Reserve Bank
error.
A verage D aily Overdraft

Some com m enters to the 1990
proposal noted that the fee sh o u ld apply
to the average rather than th e peak daily
overdraft to provide an incentive for
institutions to cover the overdraft as
quickly as possible. Also, use of an
average overdraft is consistent w ith the
‘‘regular” pricing schem e for depository
in stitu tio n s’ daylight overdrafts,
effective in A pril 1994. T he Board
believes it w ould be appropriate to
apply th e penalty fee to the average
daily daylight overdraft rather than the
peak daily overdraft. A lthough th e peak
overdraft represents th e m axim um
exposure to th e Federal Reserve d u rin g
the day, an in stitu tio n w ould have little
incentive to reduce its overdraft
significantly du rin g th e day once it
reaches its peak, thereby potentially
exposing the Federal Reserve to a
greater degree o f risk d u e to prolonged
large overdrafts. T h e Reserve Banks w ill
calculate the average daily daylight
overdraft used to com pute penalty fees
in the sam e m an n er as the average
overdraft used to com pute "reg u lar”
daylight overdraft fees (except that the
penalty fee w ill not incorporate a
deductible, as does the "reg u lar” fee}.
The average daylight overdraft w ill
equal the sum of the negative Federal
Reserve balances at the e n d o f each
m inute of the scheduled Fedw ire
operating day (with credit balances set
to zero) divided by the total n um ber of
m inutes in th e scheduled F edw ire
operating day.

Limited-Purpose Trust Companies and
Other Zero-Cap Institutions
The Board requested com m ent in
1990 on w hether th e proposed policy
should apply to depository in stitu tio n s
that have been assigned an overdraft cap
of zero by the Federal Reserve,
including certain trust com panies. T he
Board received no com m ents on th e
proposal as it w ould apply to these
institutions. In stitutions w ith zero caps
im posed by the Federal Reserve
generally fall in to tw o categories:
lim ited-purpose trust com panies an d
“ problem ” institutions. T he Federal
Reserve Act perm its the Board to grant
Federal Reserve m em bership to lim itedpurpose trust com panies subject to




co n d itio n s th e Board m ay prescribe
pursu an t to th e A ct. As a general m atter,
m em ber lim ited-purpose tru st
com panies d o not accept reservable
dep o sits and d o not have regular
discou n t w in d o w access. T he Board
believes th at lim ited-purpose trust
com panies w ith daylight overdraft caps
of zero sh o u ld be subject to th e sam e
daylight overdraft penalty fees as
bankers’ banks that d o not m aintain
reserves and Edge corporations. Such a
policy w ould en su re consistent
treatm ent for daylight overdrafts
incurred by in stitu tio n s th at do not have
regular d isco u n t w indow access.
T h e Federal Reserve occasionally
im poses a daylight overdraft cap o f zero
on “ pro b lem ” in stitutions. For exam ple,
a depository in stitu tio n m ay have a zero
cap im posed by a Reserve Bank because
the Reserve Bank believes th e
institu tio n presents excessive risk or
because th e in stitu tio n h as n ot com plied
w ith th e paym ents system risk policy.
U nder th e Board’s policy, depository
in stitu tio n s w ith im posed zero caps th at
have access to th e d isco u n t w in d o w are
able to in c u r book-entry securitiesrelated overdrafts if collateral is posted,
but they generally may n ot in c u r
overdrafts caused by other activity.
T hese in stitu tio n s w ill not be subject to
the penalty fee th at w ould b e a p p licab le
to in stitu tio n s w ith n o d isco u n t w in d o w
access. T h e Board believes th ese
"p ro b lem ” in stitu tio n s are best h an d led
on an in d iv id u al basis through
collateralization and real-tim e
m onitoring w h en th e Reserve Bank
deem s necessary.

Bequest for Comment—Penalty Bate
Calculation
T he Board requests com m ent on a
revised rate for the daylight overdraft
penalty fee. T h e revised rate proposed
by th e Board w ould m ake the treatm ent
of daylight overdrafts incu rred by
in stitu tio n s w ith o u t regular d isco u n t
w indow access m ore com parable to th e
treatm ent of overnight overdrafts. As
noted above, for overnight overdrafts, all
institu tio n s are charged a penalty fee
and are required to m ake up their
overnight reserve or clearing account
deficiencies on a subsequent night.
T hus, th e full penalty assessed for
overnight overdrafts is th e overnight
penalty fee p lu s th e lost interest on th e
excess funds that m ust be h eld the
follow ing night. If an in stitu tio n w ith o u t
disco u n t w indow access in cu rs a
daylight overdraft, th e Board's policy
does not require th e in stitu tio n to h o ld
"excess” daylight b alances on th e
follow ing day. Therefore, to equalize th e
treatm ent of overnight an d daylight
overdrafts by th ese in stitu tio n s, th e

Board p roposes that th e ir daylight
overdrafts be subject to a penalty fee at
a rate equdi to th e overnight penalty rate
plu s th e federal funds rate (e.g., given a
10 percent overnight penalty rate a n d a
3 percent federal funds rate, the daylight
penalty rate w ould he 13 percent}.7
T he Board also proposes to adjust th e
m anner in w hich th e penalty fee is
calculated to m ake it sim ilar to th e
calculation of th e "reg u lar” daylight
overdraft fee. T h e "reg u lar” daylight
overdraft fee is q uoted on a 24-hour
basis, for a 360-day year, and adjusted
for th e length of th e F edw ire operating
day. T his adjustm ent m aintains a
constant per-m inute charge in th e event
th at Fedw ire h o u rs change. T h e
proposed daylight penalty rate w ould be
quoted on a sim ilar basis. To calculate
the daylight penalty rate, th e "fu ll”
overnight rate (overnight rate plus
federal funds rate) w o u ld be converted
to a 24-hour rate, th en adjusted to take
account of the Fedw ire operating day.
T his conversion w o u ld be accom plished
by (1) d iv id in g th e “ fu ll” overnight rate
by 14, th e n u m b e r of h o u rs in a
hypothetical “n ig h t,” and m u ltip ly in g
by 24 to obtain th e 24-hour rate, th en (2)
m u ltip ly in g th e 24-hour rate by th e
fraction of th e day F edw ire is sch ed u led
to operate (10/24 given th e cu rren t 10h o u r F edw ire day). A ssum ing an
overnight overdraft rate of 10 percent, a
federal funds rate o f 3 percent, and th u s
an " fu ll” overnight p en alty rate of 13
percent (penalty p lu s lost interest), th e
an n u al 24-hour daylight penalty rate
w ould be 22.3 percen t (13 percent x (24/
14)). T he corresp o n d in g an n u al daylight
penalty rate for a 10-hour F edw ire
operating day w ould be 9.3 percent
(22.3 percent x (10/24)), and the daily
rate w ould be 2.6 basis p o in ts (9.3
percent / 360 days).
T he Board an ticip ates that th e cost to
affected in stitu tio n s, particularly those
that in cu r occasional large book-entry
securities-related overdrafts, w ould be
significantly low er u n d er the proposed
revised rate as o pposed to th e cost
u n d er th e B oard’s 1990 proposal.
H ow ever, th e Board seeks a penalty rate
at a level high enough to provide a
substantial in cen tiv e for in stitu tio n s
w ith n o regular d isco u n t w in d o w access
to avoid daylight overdrafts.
7 As an intraday funds market has not yet
»
developed, the Board believes that the federal funds
rate, rather than the “regular” annua) d ay lig h t,
overdraft price of 60 basis points, more accurately
reflects the cost of the funds that an institutionwould have to hold during the day to make u p for
the previous day’s daylight overdrafts.

Federal Register / Vol. 58, No. 162 / Tuesday, August 24, 1993 / Notices
S u m m a ry o f C o m m en ts on 1990
P roposal
The Board received 29 com m en ts on
its 1990 proposal, categorized as
follow s:

Corporate credit unions ......................
Bankers’ banks (commercial banks)8 .
Trade associations ...............................
Commercial banks .......................... ........
Credit unions ........................................
Bank holding companies ....................

11
7
4
3
2
2

Total ...............................................
29
8This category refers to bankers’ banks
that maintain reserves and thus have access
to the discount window.
S co p e
T w enty-three resp on d en ts
com m ented on the sc o p e o f the
prop osal’s coverage. O ne trade
association and sev en b ank ers’ banks
asked the Board to clarify that the
p en alty fee d oes n ot a p p ly to bankers’
banks that are m em bers o f th e Federal
R eserve System , m aintain reserve
accoun ts at their resp ective R eserve
Banks, have a ccess to th e d isco u n t
w in d o w , and have esta b lish ed cap s
under the paym ents system risk p o licy .
A s stated above, th e p en alty fee d o es not
ap ply to bankers’ banks that m aintain
reserves. T h ese bankers’ banks are
treated in the sam e m anner as
com m ercial banks under th e p aym en ts
system risk p olicy .
C orporate C redit U nion C o m m en ts
T hirteen com m en ters, in clu d in g n in e
corporate credit u n io n s and o n e trade
association (co llectiv e ly , “th e CCU
com m en ters”) strongly objected to the
proposal, w h ich th ey cla im ed w o u ld
u nn ecessarily u n d erm in e th e corporate
credit u n io n s’ ab ility to p rovid e
paym ents services to cred it u n io n s
n ation w id e. T heir prim ary ob jections
were:
1. D iscoun t W in d ow A cc ess for
Corporate Credit U n io n s
T h e CCU com m en ters argued that the
Board sh ou ld not b ase its p o lic y on th e
fact that corporate cred it u n io n s d o not
have regular d isco u n t w in d o w a cc ess
b ecau se th e Federal Reserve A ct
sp ecifica lly grants a ccess to in d iv id u a ls,
partnerships, and corporations on th e
collateral o f governm ent secu rities.
T h ey stated that th e h ealth o f th e
corporate credit u n io n n etw ork h as
obviated the n eed for th e corporate
cred it u n io n s to seek cred it from the
F ederal R eserve and that th e corporate
cred it u n io n s h av e a c c e s s to th e
.
N ational Credit U n io n A d m in istra tio n ’s
, central liq u id ity facility ip dip even t ,
th e y n eed em ergen cy fun din g.

th e Monetary Control Act (“MCA”)
subjected all depository institutions to




reserve requirem ents and provid ed that
n onm em ber depository in stitu tio n s
sh a ll have the sam e d isco u n t w in d o w
borrow ing p rivileges as m em bers,9 but
th e A ct sp ecifica lly exem p ted bankers’
banks from these requirem ents and
p riv ileg e s.10 N evertheless, th e Board has
p erm itted bankers’ banks to have access
to th e d iscou n t w in d o w if th ey ch o o se
to m aintain reserves. T h e Board’s p o lic y
is co n sisten t w ith C ongress’ purpose in
th e MCA to a llo w all d ep ository
in stitu tio n s access to th e d isco u n t
w in d o w and other System services as a
q u id p ro quo for m aintain in g reserves.
T h e Board, in its R egulation A,
e x p lic itly ex clu d ed bankers’ banks and
m em ber banks that do n ot have
reservable d ep osits, su ch as certain trust
com p an ies, from the d efin ed group o f
d ep ository in stitu tio n s that h a v e regular
d isco u n t w in d o w a c c e s s.11 T his
ex c lu sio n w as based on th e p rem ise that
th e d isco u n t w in d o w is m eant to be a
b en efit for th ose in stitu tio n s that bear
th e burden o f m aintain in g reserves and
an aid to the im p lem en tation o f
m onetary p o licy .
T h e Federal R eserve A ct p rovid es that
th e R eserve Banks m ay m ake em ergen cy
d isco u n t w in d o w loan s to in d iv id u a ls,
partnerships, and corporations in
certain circum stances or m ay m ake
ad vances secured by U .S. governm ent
ob ligation s to these e n tities subject to
an y lim itation s th e Board m ay prescribe.
T h e Board’s R egulation A au th orizes th e
Reserve Banks to m ake em ergen cy
d isco u n t w in d o w loan s to in d iv id u a ls,
partnerships, and corporations o n ly in
u n u su a l and exigen t circu m stan ces if, in
th e judgm ent o f the R eserve Bank, credit
is not available from other sou rces and
failure to p rovid e credit w o u ld
ad versely affect the eco n o m y . T h ese
em ergen cy loan s require co n su lta tio n
w ith th e Board, and if th e loan is to be
secu red by collateral other than
secu rities backed by th e U n ited States or
its agen cies, an affirm ative v o te o f five
Board m em bers. T h us, alth ou gh it m ay
be p o ssib le for bankers’ banks to obtain
d isco u n t w in d o w a cc ess u n d er the
em ergency p ro v isio n s o f R egulation A,
su ch loan s are seld o m m a d e an d, by
r e f l a t i o n and in so m e c a ses by statute,
require Board attention.
2. Pyram iding o f R eserves
T h e CCU com m en ters argued that
reserve m ainten an ce b y corporate credit
u n io n s w o u ld result in reserve
“pyram iding” b eca u se th eir m em ber
cred it u n io n s are already subject to
reserve requirem ents u n d er th e Board's
» n U .S.C 461 (b)(2) and (b)(7).
•o i2 U .S C . 461(b)(9).
• •S«e 12 CFR 201.2(a)(2).

44675

R egulation D. H ow ever, there w o u ld be
n o “ pyram iding” or d o u b le-cou n tin g of
reserves if corporate cred it u n io n s
m ain tain ed reserves. Credit u n io n s,
w h e n calcu latin g their reservable
lia b ilities, can take a “d u e from ”
d ed u ctio n for d ep o sits subject to
im m ed iate w ithd raw al h eld at corporate
credit u n io n s. For exam p le, if a credit
u n io n d ep o sits $1 m illio n in a dem and
accou n t at a corporate credit u n io n , the
corporate credit u n io n w o u ld m aintain
reserves on that am ount and th e credit
u n io n w o u ld d ed u ct $1 m illio n from the
am oun t on w h ic h it m ust m aintain
reserves.
3. Equal A c c e ss to S ervices
T h e CCU com m en ters asserted that
th e B oard’s p roposal to treat corporate
cred it u n io n s differently from other
in stitu tio n s v io la tes the MCA p rin cip le
that th e Federal Reserve sh o u ld provide
d ep o sito ry in stitu tio n s equal a ccess to
F ederal Reserve services. There is no
in d ica tio n in the MCA, h o w ever, that
C ongress in ten d ed the a llo w a n ce o f
overdrafts to be a Federal Reserve
service. On th e contrary, the MCA
sp ec ifica lly p rovid es that “nonm em bers
sh a ll be subject to any * * * term s,
in c lu d in g a requirem ent o f balances
su ffic ien t for clearing p u rposes, that the
Board m ay d eterm in e are ap p licab le to
m em ber b ank s.” T h e p urpose o f such
b a la n ces w o u ld be to avoid overdrafts.
(The m ain ten an ce o f clearing b alances
d o e s n ot give rise to d isco u n t w in d o w
a cc ess u n d er R egulation A.)
4. C om p etitive In eq u ities
T w en ty resp on d en ts co m m en ted on
th e n egative effects that an absolute
p roh ib ition o f d ayligh t overdrafts w o u ld
h a v e on bankers’ banks and Edge
corporations. T w e lv e com m enters,
m a in ly corporate cred it u n io n s, stated
that a p roh ibition o f overdrafts w o u ld
p la ce them at a co m p etitiv e
disadvan tage v is-a -v is other market
p articipants. T h e corporate credit
u n io n s w ere particularly con cern ed that
th e p rop osal w o u ld force credit u n io n s
to d o b u sin e ss w ith com m ercial banks,
th eir direct com p etitors, if th ey w ish ed
to co n tin u e to offer book-entry secu rities
se rv ic es to their custom ers.
T h e com m en ters m ay b e correct in
th eir assessm en t that p en alty fe e s on
d ayligh t overdrafts w ill affect their
co m p etitiv e p o sitio n v is-a -vis
d ep o sito ry in stitu tio n s. For ex a m p le,
d ayligh t overdraft data for U .S . Central
C redit U n io n sh o w frequent d ayligh t
overdrafts in th e early m orning hours.
T h e p o ssib ility o f early-m orning
overdrafts m ight b e in creased b y the
n e w p ostin g p roced u res that g o in to
effect in O ctober 1993. U .S . Central

44676

Federal Register / Vol. 58, No. 162 / Tuesday, August 24, 1993 / Notices

funds itse lf largely through ACH debit
transactions. U nder th e n e w procedures,
the funds from th e ACH deb it
transactions w ill b e p o sted at 11 a.m ., as
op posed to the current p o stin g o f netp ositive ACH deb it tran saction s at th e
op en ing o f b u sin ess. U n d er th e Board’s
p o licy , U.S. Central w ill pay a p en a lty
fee on its daylight overdrafts.
H ow ever, corporate cred it u n io n s
currently h a v e a sig n ifica n t advantage
over com p etin g d ep ository in stitu tio n s
because they d o not h a v e to m aintain
reserves. T h e Board b e lie v e s that th e
disadvantages o f th e p roposal to
corporate credit u n io n s w o u ld b e offset
by the advantages th ey currently enjoy.
Eight com m enters asserted that, given
the infrequency and sm all siz e o f
bankers’ bank overdrafts, th e relatively
low degree o f risk d o e s not justify th e
burden o f a fist overdraft proh ibition for
th ese in stitu tions. O n e com m en ter
claim ed that risk to th e Federal Reserve
w o u ld b e in creased if corporate cred it
u n ion s w ere obligated to o p en Federal
Reserve a ccou n ts in order to in cu r
overdrafts. T w o com m en ters n oted that
credit u n io n cu stom ers w o u ld
ex p erien ce a decreased se rv ice lev el and
w orse funds availab ility u n d er the
proposal.
A s noted above, th e n ew p o lic y d o e s
m ore than address risk. T h e p en a lty fee
h elp s ensure that in stitu tio n s that d o
not have regular d isco u n t w in d o w
access w ill not re ce iv e e x te n sio n s o f
Federal R eserve cred it in th e form o f
d aylight or overnight overdrafts.
Edge C orporation s
G iven th e send er-con trolled nature o f
the book-entry se cu ritie s sy stem , five
Edge corporation a ffilia tes and a trade
association favored a co n tin u a tio n o f th e
present p o licy o f a llo w in g Edge
corporations to esta b lish a ca p and incur
collateralized book-entry secu rities
overdrafts. T h e co m m en ters argued that
Edge corporation intraday overdrafts
that are lim ited by a ca p an d backed by
sou nd collateral are rela tiv ely risk-free.
A nother com m en ter requ ested that Edge
corporations b e a llo w e d to p led g e th e
secu rities in transit a s collateral for a
book-entry secu ritie s overdraft. O ne
corporate credit u n io n su ggested that
the present Edge corporation p o lic y be
extend ed to bankers’ h a n k s. O n e Edge
affiliate com m en ted sp e c ific a lly on th e
proposal as it ap p lied to “ p rob lem ”
in stitu tio n s w ith im p o sed zero cap s.

Hie commenter stated that the proposal
may be appropriate fo r these zero-cap
institutions, but drew a distinction
between these entities and an Edge
corporation with a financially sound
parent that incurs daylight overdrafts for
a short period of time.




H ie Board agrees that m any im p osed zero-cap in stitu tio n s, e sp e c ia lly th o se
that h ave b een assig n ed a zero cap d u e
to their finan cial p rob lem s, p o se m ore o f
a risk than Edge corporations w ith
finan cially so u n d parents. Such Edge
Corporations, h o w ever, c o u ld arrange to
obtain funding intraday from their
parents or ch a n n el a ll th e ir paym ents
activity through th eir parents, th u s
avoid in g dayligh t overdrafts th em selv es.
S hould an Edge corporation in cu r a
d aylight overdraft, there is a p o ssib ility
that its parent c o u ld b e u n ab le or
u n w illin g to cover th e Edge
corporation’s overdraft at th e en d o f the
day.
In ad dition , collateral and p ricing
serve tw o related but separate purposes.
A lthough collateral lim its R eserve Bank
risk, its p urpose is to m ake d isco u n t
w in d o w lo a n s to book-entry se cu ritie s
overdrafters fea sib le during p eriod s o f
operational d iffic u lty . T h e d aylight
overdraft p en alty fee is d esig n ed to
create e c o n o m ic in c e n tiv e s to elim in a te
the u se o f d ayligh t cred it by in stitu tio n s
w ith ou t regular d isco u n t w in d o w
a ccess. T h e Board b e lie v e s that their
lack o f a cc ess to th e d isco u n t w in d o w
su ggests that Edge corporations sh o u ld
be subject to th e sa m e p o licy as bankers'
banks that d o not m aintain reserves.
O verdraft M easu rem en t P roced u res
S ev en com m en ters argued that th e
proposal w a s p articularly unfair in light
o f th e overdraft m easurem ent
procedures orig in a lly p rop osed b y th e
Board und er w h ic h ACH and other n o n ­
w ire p aym ents w o u ld b e p osted at th e
end o f th e b u sin e ss d a y (54 FR 2 6 0 9 4 ,
June 2 1 ,1 9 8 9 ). T h e com m en ters stated
that the late p o stin g com b in ed w ith th e
daylight overdraft p en alty fee w o u ld
elim inate m any overnight in v estm en t
op portu nities for corporate credit
u n ion s, w h ile bank s co u ld co n tin u e to
m ake in v estm en ts b y incurring d ayligh t
overdrafts. O n e corporate cred it u n io n
supported th e B oard’s proposal as lon g
as n on -w ire transaction p o stin g is not
m oved to th e en d o f th e day.
T h e Board ad op ted p ostin g
p rocedures for m easu rin g d aylight
overdrafts (see 57 FR 4 7 0 9 3 , O ctober 14,
1992) that p rovid e for p o stin g ACH
credit transactions at the o p en in g o f
b u sin ess, ACH deb it transactions at 11
a.m . Eastern T im e, an d ch eck
transactions throughout th e day. H ie
Board b e lie v e s that th is intraday p ostin g
a llev ia tes m any o f th e co n cern s
regarding in v estm en t op p ortu n ities
raised by th e com m en ters.
P en alty Fee
Eight com m en ters sp ec ifica lly
op posed the p ro p o sed p en alty fee. T h e

com m enters gen erally b elieved th e
p roposed fee to be e x c e ssiv e and
on erou s, particularly given the
u ncon trollab le nature o f book-entry
secu rities overdrafts. T he com m enters
q u estion ed w h eth er th e penalty fee
w o u ld d eter d ayligh t overdrafts. Three
com m en ters su ggested that th e fee be
brought in lin e w ith th e 6 0 basis point
annual fee p rop osed b y the Board for
daylight overdrafts by other institutions.
T w o com m en ters su ggested that the
p enalty fee be a p p lie d to th e average
overdraft rather th a n th e m axim um
overdraft to p ro v id e an in c e n tiv e for
in stitu tio n s to co y er th e overdraft as
soon as p o ssib le. T w o com m enters
su ggested th e fee b e tailored to overdraft
siz e and frequency. O n e Edge
corporation affiliate su ggested that the
am ount subject to th e p en alty fee be
subject to a d e d u c tib le o f 10 percent o f
th e capital o f th e E dge corporation’s .
parent bank to offset overdrafts that
occurred d u e to circu m sta n ces beyon d
the in stitu tio n ’s con trol. A nother
com m en ter su ggested that Reserve
Banks a llo w a o n e hour grace period
before a sse ssin g a p en alty fee to allow
a reasonable tim e for th e in stitu tion to
cover an in adverten t overdraft.
„ A s d iscu sse d ab ove, th e Board is
requesting com m en t on a m odified
proposal to a sse ss a fee at th e overnight
overdraft p en alty rate p lu s th e federal
fun ds rate, ad ju sted for th e length o f the
F ed w ire operating d ay, against the
average d a ily d ay lig h t overdraft. U nder
th e p o lic y a d op ted b y th e Board and the
p roposed rate re v isio n , th e cost to
overdraw ing in stitu tio n s w ill be
su b stan tially lo w e r than under the 1990
proposal.
A ltern atives
T h e Board receiv ed several com m ents
offering alternative m eth od s of
ad dressing d ayligh t overdrafts by
bankers' banks and E dge corporations.
S even CCU com m en ters b eliev ed that
th e Board’s requirem ent that an
in stitu tion h old reserve or clearing
balances at a R eserve Bank in order to
have d isco u n t w in d o w a ccess sh ou ld
not ap p ly to corporate credit u n ion s, as
long as they m ain tain an “ overdraft
p rotection a cc o u n ts” at U.S. Central
Credit U n io n or at R eserve Banks that
cou ld b e a cc essed b y th e R eserve Banks
in th e ev en t o f an overdraft. H ie CCU
com m en ters p rop osed that each
corporate credit u n io n ’s account be
funded in th e am ou n t o f 10 percent o f
the corporate cred it u n io n ’s risk-based
capital. T h e com m en ters argued that
their su ggested overdraft
co llateralization m eth od is consistent
w ith other asp ec ts o f th e Board’s
p aym ents sy stem risk p o licy.

Federal Register / VoL 58, No. 162 / Tuesday, August 24, 1993 / Notices
A s d iscu sse d above, th e ex c lu sio n o f
bankers' banks that d o not m aintain
reserves from d isco u n t w in d o w a ccess
w as b ased on th e prem ise that d iscou nt
w in d o w access is a q u id p ro q u o for the
burden o f m aintain in g reserves and is
an aid to th e Federal Reserve in the
im plem en tation o f m onetary p o licy . A
d ep o sit o f collateral by bankers’ banks at
the F ederal Reserve or at U .S . Central,
as suggested by th e CCU com m enters,
w o u ld n ot m eet the MCA or R egulation
A requirem ents for regular, d iscou n t
w in d o w a ccess and w o u ld be contrary
to the Board's p o licy that bankers' banks
m ust m aintain reserves in order to have
d isco u n t w in d o w access.
S ix com m en ters suggested that, ,
instead o f charging a p en alty fee, a more
effective w a y to redu ce risk w o u ld b e to
p lace bankers’ banks and Edge
corporations on the real-tim e m onitor
and to refuse unfun ded transfers. T w o
com m en ters suggested that th e bookentry system be redesign ed so that
d eliv eries cou ld be rejected if they cau se
an overdraft. O ne com m enter also
su ggested that a standard p ostin g tim e
be estab lish ed for all book-entry security
d eb its and credits.
At an in stitu tio n ’s request, a Reserve
Bank w ill m onitor its accoun t in real
tim e and reject outgoing fun ds transfers
that w o u ld ca u se an overdraft. H ow ever,
autom atic rejection or q ueuin g of
secu rities transfers and a standard
secu rities posting tim e w o u ld require
sign ifican t chan ges in the operations o f
the F ederal R eserve’s book-entry
security system . T h e Federal Reserve is
currently stu d yin g various long-term
im provem en ts to its book-entry system .
C o m p e titiv e Im p a c t A n a ly sis
T he Board assesses the com p etitive
im pact o f changes that h a v e a
substantial effect on paym ents system
p articip an ts.12 U nder th is a n alysis, the
Board d eterm ines w h eth er th e change
w o u ld h ave a direct and m aterial
adverse effect on the ab ility o f other
service providers to com p ete effectiv ely
w ith the Federal Reserve in provid in g
sim ilar services.
T h e CCU com m enters stated that the
n ew p o lic y w o u ld put them at a
c o m p etitiv e disadvantage vis-a-vis other
p aym en ts system participants,
particularly in book-entry security
settlem en t and safek eepin g services.
T h e CCU com m en ters asserted that
d ayligh t overdraft p en alty fees w o u ld
d rive corporate credit u n io n s out o f th e
secu rities services and w o u ld force
•2 T hese assessm ent procedures are described in
the Board’s policy statement entitled “The Federal
Reserve in the Payments System" (55 FR 11648,
March 2 9 .1 9 9 0 ).




credit u n io n s to d o b u sin ess w ith other
service providers. Such other service
providers cou ld b e private in stitu tio n s,
su ch as com m ercial banks, or credit
u n io n s cou ld ch o o se to estab lish
accou n ts directly w ith a Federal Reserve
Bank.
T he Board d o es not b elie v e that its
p o licy ad versely affects the ab ility o f
corporate credit u n io n s to com p ete w ith
the Reserve Banks in p roviding
p aym ents services. T he p o licy p laces
con trols on the u se o f the Federal
R eserve Banks’ funds and book-entry
transfer s e n ices, w h ich are co n sisten t
w ith con trols u sed in private clearing
and settlem ent system s. Corporate credit
u n io n s have the ab ility to estab lish cap s
and collateralize book-entry secu rities
overdrafts if they volu ntarily m aintain
reserves, as com m ercial banks are
required to do. By volu ntarily
m aintain in g reserves, the corporate
credit u n io n s w o u ld avoid th e p enalty
fees that, according to their com m en ts,
w o u ld cau se their custom er credit
u n io n s to go the Reserve Banks or
elsew h er e for p aym ents services.

By order of the Board of Governors of the
Federal Reserve System. August 18,1993.
William W. Wiles,

Secretary of the Board.
[FR Doc. 93-20406 Filed 8-23-93; 8:45 ami
BILUNG CODE S2Y0-01-P

[Docket No. R-0806]

Proposals To Modify the Payments
System Risk Reduction Program; SelfAssessment Procedures, Caps for U.S.
Branches and Agencies of Foreign
Banks
AGENCY: Board o f Governors o f the
Federal Reserve System .
ACTION: Request for com m ent.
SUMMARY: T he Board is requesting
com m en t on p roposed m o d ifica tio n s to
its P o licy Statem ent on P aym ents
System Risk. T h e Board is p rop osin g to
m od ify in tw o w a y s th e p rocedures that
d ep ository in stitu tio n s m u st u se if they
ch o o se to co m p lete a self-assessm en t to
estab lish a d aylight overdraft net debit
cap. First, effective for self-assessm en ts
perform ed on or after January 1 ,1 9 9 5 ,
the Board is p rop osing that depository
in stitu tio n s evaluate their operating
con trols and co n tin gen cy procedures in
ad d ition to the three ex istin g
co m p o n en ts o f the self-assessm en t
(creditw orth in ess, intraday funds
m anagem ent and control, and custom er
credit p o lic ie s and controls). S econ d ,
th e Board is p rop osin g that depository
in stitu tio n s u se a sim p lified
“ C reditw orthiness M atrix” to determ in e

44677

their cred itw orth in ess rating, excep t in
certain lim ited circu m stances, effective
January 1 ,1 9 9 4 . In ad d ition to these tw o
ch an ges to the self-assessm en t
p rocedures, the Board is p roposing to
e lim in a te the requirem ent that U.S.
b ran ch es and a gen cies o f foreign banks
p rovid e inform ation on U.S. funding
cap ab ility and d iscou n t w in d o w eligib le
collateral for u se in determ ining their
d ayligh t overdraft net debit caps,
effec tiv e January 1 ,1 9 9 4 . O verall, the
p rop osals w o u ld decrease th e burden of
co m p ly in g w ith th e Board’s p o licy ,
im p rove the co n sisten cy o f net debit
cap s across in stitu tion s, and reduce
risks by encouraging d ep ository
in stitu tio n s to focus attention on
operational risks in th e p rovision o f
p aym ent services.
DATES: C om m ents m ust b e subm itted on
or before October 8 ,1 9 9 3 .
ADDRESSES: C om m ents, w h ich sh ou ld
refer to D ocket N o. R -0 8 0 6 , m ay be
m a iled to Mr. W illiam W. W iles,
Secretary, Board o f G overnors o f the
Federal R eserve S ystem , 20th Street and
C onstitution A v en u e NW ., W ashington,
DC 205 5 1 . C om m ents addressed to Mr.
W iles a lso m ay be d elivered to the
Board’s m ail room b etw een 8:45 a.m.
and 5:15 p.m . and to the secu rity control
room o u tsid e o f th o se hours. B oth the
m ail room and the secu rity control room
are a cc essib le from th e courtyard
entrance on 20th Street b etw een
C onstitution A v en u e and C Street, NW.
C om m ents m ay be in sp ected in room B 1122 b etw een 9 a.m. and 5 p.m .
FOR FURTHER INFORMATION CONTACT:

Jeffrey C. Marquardt, A ssistant Director
(2 0 2 /4 5 2 —2360), Paul Bettge, Manager
(2 0 2 /4 5 2 -3 1 7 4 ), D iv isio n o f R eserve
Bank O perations and P aym ent System s;
for th e hearing im paired only:
T eleco m m u n ica tio n s D evice for the
Deaf, D orothea T h om pson (2 0 2 /4 5 2 3544).
SUPPLEMENTARY INFORMATION:

B ackgroun d
T h e Federal R eserve first issu ed a
p o lic y statem ent on risks in large-dollar
w ire transfer sy stem s in 1985. T h is
p o licy required that depository
in stitu tio n s incurring d aylight
overdrafts in their Federal R eserve
a cc o u n ts as a result o f Fed w ire funds
transfers estab lish a m axim um lim it, or
net deb it cap, on overdrafts incurred in
th o se accou n ts. To im p lem en t the
original p o lic y , a d ocu m ent en titled
U sers’ G u id e to the P o licy Statem ent,
w a s prepared and d istributed to
d ep o sito ry in stitu tio n s in 1985.
T h e original p o licy h as b een
ex p a n d ed an d en h an ced sin c e 1985.
T h e U ser s’ G uide w a s updated

44678

Federal Register / Vol. 58, No. 162 / Tuesday, August 24, 1993 / Notices

accordingly and reissued in 1988. In
1992, the Board issued a com prehensive
statement of its previously adopted
policies regarding payments system risk.
The Federal Reserve is currently in the
process of updating the Users’ Guide to
incorporate changes in the policy since
1988, including the modifications
approved by the Board in late 1992
regarding intraday posting of
transactions and fees for daylight
overdrafts. The updated Users’ Guide
w ould also include the amendments to
the 1992 com prehensive policy
statement that are proposed in this
notice, if ultimately adopted by the
Board. The Board expects to issue the
Guide to the Federal Reserve’s Payments
System Risk Policy once public
com m ents on this notice’s proposals
have been received and considered.
(The Board is also proposing to update
the introductory section to its policy
statement to reflect the availability of
the Overview, discussed below, as w ell
as the Guide’s new title.) Once issued,
the Guide to the Federal Reserve’s
Payments System Risk Policy w ill
supersede previously issued versions of
the Users’ Guide. A draft copy of the
Guide to the Federal Reserve’s Payments
System Risk Policy is available from any
Reserve Bank for review. The Federal
Reserve has also prepared a new

summary document, entitled Overview
o f the Federal Reserve’s Payments
System Risk Policy, w hich is intended
to describe the requirements of the
policy for institutions that incur
m inimal daylight overdrafts.
Self-Assessm ent Procedures
Under the Board’s policy, an
institution’s net debit cap (for a single
day and on average over a two-week
period) is based on its cap category. The
three cap categories that permit the
highest use of intraday credit are the
Average, Above Average, and High cap
categories. An institution that w ishes to
establish a cap in one of these categories
must com plete a self-assessm ent of its
creditworthiness, intraday funds
management and control, and customer
credit policies and controls.
The Board is proposing to add a
fourth com ponent, operating controls
and contingency procedures, to the selfassessment procedures. This com ponent
is critical to a thorough self-assessment
because institutions could incur
significant financial losses as a result of
fraud and because operational failures at
payment system participants could
disrupt financial markets.
As a result of the potential added
burden placed on depository
institutions, the Board anticipates that
implementation o f this requirement, if

approved, w ill be delayed until January
1 ,1 9 9 5 in order to provide institutions
sufficient time to adopt procedures for
evaluating this component. The Board
w ould w elcom e comments on whether
it is appropriate to incorporate a
com ponent on operational controls and
contingency procedures into the selfassessm ent procedures as w ell as any
potential administrative burden of
including this additional requirement.
The Board is also proposing a change
in the procedures for completing the
creditworthiness component of the selfassessment. These new procedures are
described fully in the draft Guide to the
Federal Reserve’s Payments System Risk
Policy, which is available from any
Reserve Bank. Since the inception of the
self-assessm ent process for establishing
net debit caps, concerns have been
raised regarding the administrative
burden raised by the self-assessment
procedures. In an attempt to reduce
burden on institutions electing to
com plete a self-assessm ent, the Board
has developed a matrix that combines
an institution’s supervisory rating and
Prompt Corrective Action capital
category into a creditworthiness rating.1
This “Creditworthiness Matrix” is
shown below.
Creditworthiness Matrix

Supervisory composite rating
Capital level

Well Capitalized .................................................................................................
Adequately Capitalized ....................................................................................
Undercapitalized.................................................................................................

Strong

Satisfactory

Excellent ......................
Very Good ..................
Full Assessment ........

Very Good ...................
Very Good ....... ...........
Full Assessm ent.........

Fair
Adequate
Adequate
Below Standard.

Note: Institutions with a capital level or supervisory rating not shown in the matrix would receive a creditworthiness rating of "below standard.”

While institutions electing to
com plete a self-assessm ent would still
be required to perform a full selfassessm ent in other areas, use of the
Creditworthiness Matrix should result
in a substantial reduction in the
regulatory com pliance burden for these
institutions. In addition, the use of the
Matrix achieves greater objectivity in
rating creditworthiness, and the
resulting creditworthiness ratings and
overall net debit cap categories are
likely to be more consistent across
institutions than under current
procedures.
The Board is proposing that, in nearly
all circumstances, depository
institutions com pleting a self­
1 For U.S. branches and agencies o f foreign banks
that are based in countries that adhere to the Basle
Capital Accord, risk-based capital ratios calculated
according to hom e-country rules w ould be




assessm ent use the Creditworthiness
Matrix to determine their
creditworthiness rating. In certain
limited circum stances, however, an
institution may be permitted to perform
a full assessm ent of its creditworthiness.
For example, an institution w hose
condition has changed significantly
since its last exam ination, or that
possesses additional material
information regarding its financial
condition, may reasonably be permitted
to use these factors to support a higher
creditworthiness rating that w ould be
derived using the Creditworthiness
Matrix alone. A dditionally, U.S.
branches and agencies of foreign banks
from countries that do not adhere to the
compared to the Prompt Corrective Action capital
categories, and the resulting capital level w ould be
used in the C reditworthiness Matrix.

Basle Capital Accord w ould be required
to perform a full assessm ent to
determine their rating on the
creditworthiness component.
Procedures for conducting a full
assessm ent of creditworthiness are
provided in A ppendix C of the draft
Guide to the Federal Reserve’s Payments
System Risk Policy. If adopted, the
Creditworthiness Matrix approach
w ould be effective on January 1,1994,
although earlier implementation by
institutions may be permitted.
The Board has determined that use of
the Creditworthiness Matrix would, for
certain institutions, result in a lower net
debit cap. The Board, therefore, requests
comment on whether mandatory usage

Federal Register / Vol. 58, No. 162 / Tuesday, August 24, 1993 / Notices
of the matrix approach w ould adversely
affect the smooth functioning of the
payments system.
Net Dehit Caps for U.S. Branches and
Agencies o f Foreign Banks
The determination of net debit caps
for foreign banks is based on essentially
the same procedures as those for U.S.based institutions. However, for foreign
banks, the Federal Reserve also requires
evidence of U.S. funding capability and
discount w indow eligible collateral.
Based on the evidence submitted, the
Federal Reserve may adjust the dollar
amount of an institution’s net debit cap
to a level below its cap m ultiple times
its risk-based capital.
Experience with U.S. funding
capability arid potential collateral data
has show n that a significant
administrative burden is created to
collect these data with sufficient
precision and frequency. In addition, if
the proposed Creditworthiness Matrix
approach, also discussed in this notice,
is adopted by the Board, net debit caps
adopted by foreign banks w ill be based
on more objective supervisory ratings
and the additional data w ill be less
relevant to determining appropriate net
debit caps.
The Board requests comment on the
current limitation on net debit caps for
U.S. branches and agencies of foreign
banks and the data collection effort it
entails. The Board is proposing that,
effective January 1 ,1994, for purposes
of determining net debit caps for U.S.
branches and agencies of foreign banks,
data on U.S. funding capability and
discount w indow eligible collateral no
longer be required, provided that the
Creditworthiness Matrix proposal is also
approved.
None of the proposed am endm ents
w'ould affect a Reserve Bank’s ability to
prohibit an institution from using
intraday Federal Reserve credit, if the
institution’s use of such credit is
deem ed unsafe or unsound by its
supervisor or if the institution poses an
excessive risk to a Reserve Bank.
Federal Reserve System Policy
Statement on Payments System Risk
The Board proposes to amend its
“Federal Reserve System Policy
Statement on Payments System Risk”
under the heading “I. Federal Reserve
Policy” by replacing the last three
sentences of the Introduction, part (C)(2)
under the headings “C. Capital” and “2.
U.S. A gencies and Branches of Foreign
Banks,” and the first paragraph of part
(D)(1) under the headings “D. Net Debit
Caps" and “1. Cap Set Through SelfA ssessm ent” as set forth below:




Introduction
*
*
*
*
*
To assist depository institutions in
im plem enting the Board’s p olicies, the
Federal Reserve has prepared two
documents, w hich are available from
any Reserve Bank: the Overview o f the
Federal Reserve’s Payments System Risk
Policy and the Guide to the Federal
Reserve’s Payments System Risk Policy.
The Overview provides a summary of
the Board’s policy on payments system
risk, including daylight overdraft net
debit caps and fees. The O verview is
intended for use by institutions that
incur only small and infrequent daylight
overdrafts. The Guide explains in detail
how the policies apply to various types
of institutions and includes procedures
for com pleting a self-assessm ent and
filing a cap resolution, as w ell as
information on other aspects of the
payments system risk policy.
*
*
*
*
*
1. C. Capita!
2. U.S. A gencies and Branches of
Foreign Banks
For U.S. agencies and branches of
foreign banks, net debit caps on daylight
overdrafts in Federal Reserve accounts
are calculated by applying the cap
m ultiples for each cap category to
consolidated “U.S. capital
equivalency.” 4*
For a foreign bank w hose homecountry supervisor adheres to the Basle
Capital Accord, U.S. capital equivalency
is equal to the greater of 10 percent of
w orldw ide capital or 5 percent of the
total liabilities of each agency or branch,
including acceptances, but excluding
accrued expenses and amounts due and
other liabilities to offices, branches, and
subsidiaries o f the foreign bank. In the
absence of contrary information, the
Reserve Banks presume that all banks
chartered in G -10 countries m eet the
acceptable prudential capital and
supervisory standards and w ill consider
any bank chartered in any other nation
that adopts the Basle Capital Accord (or
requires capital at least as great and in
the same form as called for by the
A.ccord) eligible for the Reserve Banks’
review7for meeting acceptable
prudential capital and supervisory
standards.
For all other foreign banks, U.S.
capital equivalency is measured as the
greater of: (1) The sum of the amount of
capital (but not surplus) that w ould be
4The term “ U .S. capital equivalency” is used in
this context to refer to the particular capital
measure used to calculate daylight overdraft net
debit caps, and does not necessarily represent an
appropriate capita! measure for supervisory or other
purposes.

44679

required of a national bank being
organized at each agency or branch
location, or (2) the sum of 5 percent of
the total liabilities o f each agency or
branch, including acceptances, but
excluding accrued expenses and
amounts due and other liabilities to
offices, branches, and subsidiaries o f the
foreign frank.
In addition, any foreign bank may
incur daylight overdrafts above its net
debit cap up to a maximum amount
equal to its cap m ultiple tim es 10
percent of its w orldw ide capital,
provided that any overdrafts above its
net debit cap are collateralized. This
policy offers all foreign banks, under
terms that reasonably lim it Reserve
Bank risk, a level of overdrafts based on
the same proportion of w orldw ide
capital. Consequently, banks chartered
in countries that follow the Basle
Accord and w hose net debit cap is
based on 10 percent of w orldw ide
capital are not permitted to incur
overdrafts above their net debit cap. A ll
other foreign banks may incur overdrafts
to the same extent as banks from Basle
Accord countries, that is, up to their cap
m ultiple tim es 10 percent of their
wrorldwide capital, provided that
sufficient collateral is posted for any
overdrafts in excess of their net debit
cap. In addition, foreign banks may elect
to collateralize all or a portion of their
overdrafts related to book-entry
securities activity.
*

*

*

*

*

I.D. N et D ebit Caps
1. Cap Set Through Self-Assessm ent
In order to establish a net debit cap
category of Average, Above Average, or
High, an institution must perform a selfassessm ent of its own creditworthiness,
intraday funds management and control,
customer credit policies and controls,
and, effective January 1 .1 9 9 5 , operating
controls and contingency procedures.
The assessm ent of creditworthiness
should be based on the institution’s
supervisory rating and Prompt
Corrective Action capital category. An
institution may be permitted to perform
a full assessm ent of its creditworthiness,
in certain lim ited circum stances, for
exam ple, if its condition has changed
significantly since its last exam ination,
or if it possesses additional material
information regarding its financial
condition. Additionally, U.S. branches
and agencies of foreign banks from
countries that do not adhere to the Basle
Capital Accord w ould be required to
perform a full assessm ent to determine
their rating on the creditworthiness
com ponent. The institution should also
assess its intraday funds management

Federal Register / Vol. 58, No. 162 / Tuesday, August 24, 1993 / Notices

44680

procedures and its procedures for
evaluating the financial condition of
and establishing intraday credit lim its
for its customers. Finally, the institution
should ensure that its operating controls
and contingency procedures are
sufficient to prevent losses due to fraud
or operational failures. The Guide to the
Federal Reserve’s Payments System Risk
Policy, available from any Reserve Bank,
includes a detailed explanation of the
steps that should be taken by a
depository institution in performing a
self-assessment to establish a net debit
cap.
*

*

*

*

*

By order of the Board of Governors of the
Federal Reserve System, August 18,1993.
William W. Wiles,

Secretary of the Board.
[FR Doc. 93-20407 Filed 8-23-93; 8:45 am]
d'LUNG CODE 6210-01-P