[Federal Register Volume 59, Number 37 (Thursday, February 24, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-4131]


[[Page Unknown]]

[Federal Register: February 24, 1994]


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FEDERAL RESERVE SYSTEM

[Docket No. R-0693]

 

Modification of the Payments System Risk Policy; Bankers' Banks, 
Edge Corporations, and Limited-Purpose Trust Companies

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Policy statement.

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SUMMARY: The Board has determined to assess a penalty fee on the 
average daily daylight overdrafts in Federal Reserve accounts incurred 
by bankers' banks that do not maintain reserves, Edge and agreement 
corporations, and limited-purpose trust companies. The rate for the 
daylight overdraft penalty fee is equal to the regular daylight 
overdraft rate applicable to other institutions plus 100 basis points, 
quoted on a 24-hour basis, for a 360-day year, and adjusted for the 
length of the Fedwire operating day. The penalty fee should create an 
incentive for institutions that do not have regular discount window 
access to avoid incurring daylight overdrafts in Federal Reserve 
accounts.

DATES: Effective April 14, 1994.

FOR FURTHER INFORMATION CONTACT: Oliver I. Ireland, Associate General 
Counsel (202/452-3625) or Stephanie Martin, Senior Attorney (202/452-
3198), Legal Division; for the hearing impaired only: 
Telecommunications Device for the Deaf, Dorothea Thompson (202/452-
3544).

SUPPLEMENTARY INFORMATION: The Board has modified its payments system 
risk policy by adopting a daylight overdraft penalty fee. The penalty 
fee will be assessed on average daily daylight overdrafts in Federal 
Reserve accounts incurred by Edge and agreement corporations,1 
bankers' banks2 that do not maintain reserves, and limited-purpose 
trust companies. These institutions do not have regular discount window 
access.
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    \1\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 maintain reserves under the Board's Regulation D (12 CFR 
part 204) because it is organized solely to do business with other 
financial institutions, is owned primarily by the financial 
institutions with which it does business, and does not do business 
with the general public. A bankers' bank is not a depository 
institution as defined in the Board's Regulation A (12 CFR 
201.2(a)).
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    The Board anticipates that the penalty fee will provide an 
incentive for institutions without regular discount window access to 
refrain from incurring daylight overdrafts. This incentive will help a 
Reserve Bank to avoid a situation where it may be obliged to permit an 
overnight overdraft or to extend extraordinary discount window credit 
if an institution is unable to cover a daylight overdraft by the end of 
the business day. In addition, should daylight overdrafts be considered 
as Federal Reserve extensions of credit, the penalty fee for bankers' 
banks that do not maintain reserves would reflect the quid pro quo 
policy of reserves for discount window access embodied in the Monetary 
Control Act of 1980.

Background

    Under the Board's current payments system risk policy, most 
depository institutions may incur daylight overdrafts in their Federal 
Reserve accounts up to a maximum, or cap, that is a multiple of their 
risk-based capital. Effective April 14, 1994, the Reserve Banks will 
assess a fee of 24 basis points (annual rate) on average daily daylight 
overdrafts. After full phase-in, expected in 1996, this fee will rise 
to 60 basis points (annual rate).
    If an institution fails to cover a daylight overdraft by the close 
of the business day, it may either obtain a discount window loan (if it 
has access to the discount window) or carry the overdraft overnight (a 
practice that is discouraged by the Federal Reserve). The Reserve Banks 
charge a penalty fee on overnight overdrafts. Since 1981, the overnight 
penalty rate has equalled the higher of 10 percent or the federal funds 
rate plus 2 percent (annual rate). On February 16, 1994, the Board 
approved a new overnight overdraft penalty rate equal to the federal 
funds rate plus 4 percent, with no floor. When an institution incurs an 
overnight overdraft, it must make up for any reserve or clearing 
account deficiency by holding make-up balances on another night.
    The Federal Reserve Act exempts bankers' banks from reserve 
requirements,3 and Regulation A explicitly excludes bankers' banks 
from regular discount window access.4 Nevertheless, the Board has 
permitted bankers' banks to have access to the discount window if they 
choose to maintain reserves voluntarily. Bankers' banks that maintain 
reserves may establish a cap and incur daylight overdrafts under the 
payments system risk policy to the same extent and subject to the same 
fees as depository institutions. To address the risks arising from 
daylight overdrafts and to avoid the extension of overnight credit to 
institutions with no discount window access, current policy provides 
that bankers' banks that do not maintain reserves should refrain from 
incurring daylight overdrafts. If such institutions do incur daylight 
overdrafts, however, they are required to post collateral to cover the 
overdrafts.
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    \3\12 U.S.C. 461(b)(9).
    \4\12 CFR 201.2(a)(2).
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    Edge corporations are subject to reserve requirements, but do not 
have access to the discount window on the same basis as depository 
institutions. Instead, Edge corporations generally are funded by their 
parent depository institutions, which have discount window access. 
Current policy permits Edge corporations to establish a cap and to 
incur overdrafts within that cap, provided that they post collateral to 
cover the overdrafts. Edge corporations also may incur book-entry 
securities overdrafts above their cap, provided the overdrafts are 
collateralized.
    Limited-purpose trust companies may become members of the Federal 
Reserve, at the Board's discretion, subject to conditions the Board may 
prescribe pursuant to the Act. As a general matter, member limited-
purpose trust companies do not accept reservable deposits, do not have 
regular discount window access, and may not incur daylight overdrafts.

Previous Board Actions

    In May 1990, the Board proposed to levy a penalty fee, at a rate 
equal to the overnight overdraft penalty rate, on the maximum daily 
daylight overdrafts incurred by bankers' banks that do not maintain 
reserves and Edge corporations (55 FR 22086, May 31, 1990). In August 
1993, the Board adopted a modified version of the 1990 proposal, but 
sought further comment on the rate at which the daylight overdraft 
penalty fee would be assessed (58 FR 44672, August 24, 1993). The 
policy adopted by the Board in 1993 provides that the daylight 
overdraft penalty fee will be levied on the daily average, rather than 
maximum, daylight overdraft of institutions that do not have regular 
discount window access. The Board also determined to apply the daylight 
overdraft penalty fee to limited-purpose trust companies as well as 
bankers' banks that do not maintain reserves and Edge corporations. The 
Board retained the requirement that, in the event a bankers' bank, Edge 
corporation, or limited-purpose trust company incurs a daylight 
overdraft, the overdraft should be collateralized.5 Reserve Banks 
will have the ability to waive the penalty fee if, for example, the 
overdraft resulted from a Reserve Bank error.
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    \5\As these institutions do not normally maintain collateral 
pledged to the Federal Reserve on an ongoing basis, if a bankers' 
bank, Edge corporation, or limited-purpose trust company 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.
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    The daylight penalty rate proposed in 1993 was equal to the 
overnight penalty rate plus the federal funds rate (e.g., given a 10 
percent overnight penalty rate and a 3 percent federal funds rate, the 
daylight penalty rate would be 13 percent), adjusted for the length of 
the Fedwire operating day. The Board proposed the addition of the 
federal funds rate to make the daylight penalty rate more comparable to 
the overnight penalty rate. As noted above, institutions are required 
to make up any reserve or clearing account deficiency resulting from an 
overnight overdraft, thereby incurring a loss of interest earnings on 
the make-up funds. Rather than instituting a make-up requirement for 
daylight overdrafts subject to the penalty fee, the Board proposed that 
the daylight overdraft penalty rate include a factor to account for the 
cost of holding make-up funds.
    The Board also proposed to adjust the manner in which the penalty 
fee is calculated to make it similar to the calculation of the 
``regular'' daylight overdraft fee. The regular daylight overdraft fee 
is quoted on a 24-hour basis, for a 360-day year, and adjusted for the 
length of the Fedwire operating day. This adjustment maintains a 
constant per-minute charge in the event that Fedwire hours change. The 
Board proposed that the daylight penalty rate be quoted on a similar 
basis. Under the 1993 proposal, assuming an overnight overdraft rate of 
10 percent and a federal funds rate of 3 percent, the annual 24-hour 
daylight penalty rate would be 22.3 percent, adjusted to 9.3 percent 
for a 10-hour Fedwire operating day.

Daylight Overdraft Penalty Rate Adopted by the Board

    The Board believes that it is appropriate to retain a relatively 
high overnight penalty rate (i.e., greater than the federal funds rate) 
to provide a strong incentive for all depository institutions to avoid 
overnight overdrafts. However, a daylight penalty rate tied to the 
overnight rate would also be relatively high, perhaps higher than 
necessary to provide an incentive for institutions to avoid daylight 
overdrafts. Therefore, the daylight overdraft penalty rate adopted by 
the Board is tied to the regular daylight overdraft rate, rather then 
the overnight penalty rate.
    The daylight overdraft penalty rate adopted by the Board is equal 
to the regular Federal Reserve daylight overdraft rate plus 100 basis 
points. The annual daylight penalty rate will equal 124 basis points as 
of April 14, 1994, rising to 160 basis points when the regular daylight 
overdraft fee is fully phased in. The daylight penalty rate, like the 
regular daylight rate, will be adjusted to take account of the length 
of the Fedwire operating day, yielding a rate of 52 basis points as of 
April 14, 1994 (given a 10-hour Fedwire day), and rising to 67 basis 
points after full phase-in of the regular daylight fee. There is no 
deductible associated with the daylight overdraft penalty fee. In 
addition, the Board has set a minimum fee of $25 for any two-week 
period in which a penalty fee is assessed (i.e., any fee greater than 
zero and less than $25 over a two-week period would be rounded up to 
$25).

Summary of and Responses to Comments on 1993 Proposal

    The Board received 28 comments on the proposed penalty fee 
calculation. The comments were distributed as follows: 

------------------------------------------------------------------------
                                                                 No. of 
                      Type of commenter                        responses
------------------------------------------------------------------------
Corporate credit union.......................................         18
Commercial bank..............................................          2
Federal Reserve Bank.........................................          2
Credit union.................................................          1
Commercial bankers' bank.....................................          1
Trade association............................................          1
Bank holding company.........................................          1
Edge corporation.............................................          1
Federal agency...............................................          1
                                                              ----------
      Total..................................................         28
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    The corporate credit union commenters generally expressed similar 
views regarding the proposal. They opposed both the concept of the 
daylight overdraft penalty and the size of the proposed rate. These 
commenters contended that the Board did not present a legally 
sustainable case as to why the same daylight overdraft rate should not 
be imposed on all institutions. They also asserted that the Federal 
Reserve Act does not authorize a penalty fee for corporate credit 
unions.
    The corporate credit union commenters, as well as the National 
Credit Union Administration, maintained that one of the purposes of the 
proposed penalty fee appeared to be to penalize those bankers' banks 
that do not maintain reserves. They argued that it is unwarranted and 
contrary to the letter and spirit of the Monetary Control Act (MCA) for 
the Board to attempt to reduce the equality of treatment among users of 
Federal Reserve services by assessing corporate credit unions a penalty 
fee for daylight overdrafts.
    Five commenters, including a bank trade association, a bank holding 
company, and a commercial bankers' bank, agreed that the MCA does not 
require the Federal Reserve to treat daylight credit as a service to 
which depository institutions should have equal access. Two of these 
commenters stated that charging the same rate for all daylight 
overdrafts would give an unfair competitive advantage to those 
institutions that do not maintain reserves.
    The legislative history of the MCA indicates that Congress intended 
bankers' banks to have access to Federal Reserve payment services 
despite the fact that they do not maintain reserves, but also indicates 
that the access to Federal Reserve services was opened up to depository 
institutions in general because they all were to be subject to reserve 
requirements.6 The Board believes that, when implementing a fee 
for daylight overdrafts incurred through use of Federal Reserve 
payments services, it is reasonable to establish different rates for 
institutions that maintain reserves and those that do not. The language 
of the MCA supports this distinction, by explicitly providing that the 
Board may impose balances ``sufficient for clearing purposes'' as a 
requirement for access to Federal Reserve services. By including this 
provision, Congress recognized that certain institutions with access to 
Federal Reserve services may not hold reserves at the Reserve Bank and 
may be subject to terms that would account for that fact.
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    \6\Colloquy between Mr. Wirth and Mr. Reuss, 126 Cong. Rec. H 
2291, daily ed. March 27, 1980, and remarks of Sen. Proxmire, 126 
Cong. Rec. S 3167, daily ed. March 27, 1980.
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    The corporate credit union commenters also stated that the Board 
has not shown how daylight overdrafts incurred by corporate credit 
unions differ from those incurred by commercial banks and other 
depository institutions. Many of these commenters cited the Board's 
1989 overdraft survey, which showed that corporate credit unions 
incurred only 0.18 percent of the total amount of daylight overdrafts 
incurred. The corporate credit unions, as well as an Edge corporation, 
stated that a penalty incentive is not necessary, as these institutions 
rarely incur daylight overdrafts. The commenters also stated that 
corporate credit unions do not incur overnight overdrafts, and 
therefore there is no evidence that a daylight penalty fee is necessary 
to prevent overnight overdrafts.
    The Board believes there is a fundamental difference between 
overdrafts incurred by institutions that have access to Federal Reserve 
credit and those that do not. Even though corporate credit union 
overdrafts constitute only a small percentage of the total daylight 
overdrafts in Federal Reserve accounts, the Board believes that these 
institutions should not receive any daylight credit from the Federal 
Reserve. On the other hand, the Board allows depository institutions 
with discount window access to incur limited daylight overdrafts. The 
daylight overdraft penalty fee reflects this difference.
    The corporate credit unions and the National Credit Union 
Administration argued that the proposed penalty fee is excessive for 
the purposes of discouraging daylight overdrafts. These commenters also 
noted that the Board has stated that even the regular daylight 
overdraft fee of 60 basis points (adjusted to 25 basis points given a 
10-hour Fedwire day) will provide an incentive for depository 
institutions to reduce daylight overdrafts. The corporate credit union 
commenters, as well as a bank trade association, also noted that the 10 
percent floor in the current overnight penalty rate, to which the 
proposed daylight penalty rate was tied, yields an anomalous result as 
the federal funds rate declines. One commenter suggested that a 
daylight penalty rate 100 basis points above the federal funds rate 
should provide more than sufficient incentive for corporate credit 
unions to avoid daylight overdrafts. Four commenters, including a bank 
holding company and a commercial bankers' bank, supported the Board's 
proposed penalty fee calculation as equitable and sufficient to deter 
daylight overdrafts.
    As noted above, the daylight overdraft penalty rate adopted by the 
Board will not be linked to the overnight penalty rate, but rather to 
the regular daylight rate applicable to depository institutions. The 
daylight penalty rate will be computed using the regular daylight rate 
plus a penalty add-on of 100 basis points, which is more proportional 
to the regular daylight rate. This policy will allow the Board to 
maintain a relatively high overnight rate that will provide a strong 
incentive to avoid overnight overdrafts, while maintaining a relatively 
low daylight penalty rate that will be less of a cost burden on 
affected institutions yet high enough to effect behavioral changes by 
institutions to avoid daylight overdrafts altogether. The Board may 
consider raising the penalty rate if such behavioral changes do not 
occur. Also, if an intraday market rate were to develop in the future, 
the Board may base the daylight penalty on that rate. The daylight 
penalty rate will be adjusted to account for the length of the Fedwire 
operating day (multiplied by 10/24, given the current 10-hour Fedwire 
day), as is the regular daylight overdraft rate.
    A bank trade association recognized the Board's intent to prevent 
institutions that do not have regular discount window access from 
obtaining credit from the Federal Reserve, but stated that a penalty-
oriented approach could result in risk-shifting from the Federal 
Reserve to the private sector, rather than reducing overall payment 
system risk.
    The intent of the penalty fee is to induce institutions to manage 
their accounts so as to avoid overdrafts, this reducing overall risk. 
The Board recognizes, however, that some risk-shifting would occur if 
institutions affected by the penalty fee move their payments business 
from the Federal Reserve to the private sector. Presumably, however, 
the risk would be shifted to depository institutions that have discount 
window access and thus could obtain Federal Reserve credit to cover 
daylight or overnight overdrafts in their Federal Reserve accounts.
    Several corporate credit union commenters stated that the proposed 
penalty fee formula unfairly penalizes corporate credit unions by not 
allowing a deductible. The commenters noted that the Board's stated 
purpose of the deductible for depository institutions was to refrain 
from charging a large number of institutions who present small amount 
of risk and that this reasoning should also apply to corporate credit 
unions. One commenter suggested that, as an alternative to a 
deductible, the Board allow a one-hour grace period before assessing a 
penalty fee.
    The Board established a deductible for the regular daylight 
overdraft fee to account for Reserve Bank error and computer downtime. 
The deductible also provides a minimal amount of free intraday credit 
to depository institutions. The Board does not believe that it is 
appropriate to supply free intraday credit to institutions that do not 
have discount window access, and thus has not provided a deductible or 
grace period for the daylight penalty fee. Reserve Banks will be able 
to waive penalty fees that result from Reserve Bank error or computer 
malfunction.
    Two commenters suggested that no penalty fee be imposed until the 
Federal Reserve's book-entry securities system is redesigned to allow 
receiver control of securities deliveries. These commenters stated that 
the current system's design forces unanticipated daylight overdrafts 
and that the penalty fee punishes certain institutions for a shortfall 
in the Federal Reserve's book-entry securities transfer system.
    Although institutions that receive securities versus payment over 
Fedwire do not have operational control over the timing of the 
transaction, they often know the approximate size and time of incoming 
securities deliveries. The Board believes it is appropriate to require 
institutions without access to Federal Reserve credit to manage their 
account so as to avoid securities-related overdrafts. The Federal 
Reserve is currently studying new service capabilities that would 
permit receivers of securities to control the use of securities-related 
intraday Federal Reserve credit.
    An Edge corporation requested that, if a penalty fee is imposed, 
the Board clarify that an Edge corporation could pledge collateral to 
support regular discount window borrowing similar to the policy 
allowing bankers' banks to voluntarily maintain reserves, thereby 
allowing such Edge corporations to pay only the regular daylight 
overdraft fee rather than the penalty fee. This commenter also 
suggested that the Board should allow a parent bank to guarantee the 
daylight overdraft position of, or substitute itself for, an Edge 
corporation, similar to practice under CHIPS rules. This practice would 
allow a Reserve Bank to combine the daylight position of an Edge 
corporation and its parent.
    The Board believes that collateral and pricing serve two related 
but separate purposes. Although collateral limits Reserve Bank risk, 
its purpose is to make discount window loans to book-entry securities 
overdrafters feasible during periods of operational difficulty. The 
daylight overdraft penalty fee is designed to create economic 
incentives to eliminate the use of daylight credit by institutions 
without regular discount window access. Their lack of access to the 
discount window suggests that Edge corporations should be subject to 
the same policy as bankers' banks that do not maintain reserves. The 
policy statement notes that the parent of an Edge or agreement 
corporation could fund its subsidiary during the day over Fedwire and/
or the parent could substitute itself for its subsidiary on private 
networks. Such an approach by the parent could both reduce systemic 
risk exposure and permit the Edge or agreement corporation to continue 
to service its customers.

Competitive Impact Analysis

    The Board assesses the competitive impact of changes that have a 
substantial effect on payments system participants.7 Under this 
analysis, the Board determines whether the change would have a direct 
and material adverse effect on the ability of other service providers 
to compete effectively with the Federal Reserve in providing similar 
services.
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    \7\These assessment procedures are described in the Board's 
policy statement entitled ``The Federal Reserve in the Payments 
System'' (55 FR 11648, March 29, 1990).
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    Many corporate credit unions have argued that the daylight 
overdraft penalty fee would put them at a competitive disadvantage vis-
a-vis other payments system participants, particularly in book-entry 
security settlement and safekeeping services. These commenters asserted 
that daylight overdraft penalty fees would drive corporate credit 
unions out of the securities services and would force credit unions to 
do business with other service providers. Such other service providers 
could be private institutions, such as commercial banks, or credit 
unions could choose to establish accounts directly with a Federal 
Reserve Bank.
    The Board does not believe that its policy adversely affects the 
ability of corporate credit unions to compete with the Reserve Banks in 
providing payments services. The policy places controls on the use of 
the Federal Reserve Banks' funds and book-entry transfer services, 
which are consistent with controls used in private clearing and 
settlement systems. Corporate credit unions have the ability to 
establish caps and collateralize book-entry securities overdrafts if 
they voluntarily maintain reserves, as commercial banks are required to 
do. By voluntarily maintaining reserves, the corporate credit unions 
would avoid the penalty fees that, according to their comments, would 
cause their customer credit unions to go to the Reserve Banks or 
elsewhere for payments services. In addition, the penalty rate adopted 
by the Board is significantly lower than the rates proposed in 1990 and 
1993 and will result in a lower cost burden on corporate credit unions 
vis-a-vis their competitors.

Policy Statement

    The Board has adopted the following to replace part (I)(D)(4) of 
its ``Federal Reserve System Policy Statement on Payments System Risk'' 
under the headings ``I. Federal Reserve Policy'', ``D. Net Debit 
Caps'', and ``4. Special Situations,'' effective April 14, 1994:
    4. Special Situations. Special risks are presented by the 
participation on Fedwire of Edge and agreement corporations, bankers' 
banks that are not subject to reserve requirements, limited-purpose 
trust companies, and institutions that have been assigned a cap of zero 
by their Reserve Banks. Most of these institutions lack regular 
discount window access. In developing its policy for these 
institutions, the Board has sought to balance the goal of reducing and 
managing risk in the payments system, including risk to the Federal 
Reserve, with that of minimizing the adverse effects on the payments 
operations of these institutions.
    Regular access to the Federal Reserve discount window generally is 
available to institutions that are subject to reserve requirements. If 
an institution that is not subject to reserve requirements and thus 
does not have regular discount window access were to incur a daylight 
overdraft, the Federal Reserve may face the necessity of extending 
overnight credit to that institution if the daylight overdraft is not 
covered by the end of the business day. This credit would be contrary 
to the quid pro quo of reserves for discount window access established 
in the Federal Reserve Act and Board regulations. In addition, the 
Board expects that assessing a fee for daylight overdrafts could lead 
to an intraday funds market, similar to the current overnight funds 
market. As daylight credit begins to have significant value, daylight 
overdrafts in accounts at the Federal Reserve will begin to appear more 
and more like overnight extensions of credit by Reserve Banks. Thus, 
institutions that do not have regular access to the discount window 
should not incur either overnight overdrafts or daylight overdrafts in 
their Federal Reserve accounts.
    As set out below, Edge and agreement corporations, bankers' banks 
that are not subject to reserve requirements, and limited-purpose trust 
companies are subject to a daylight overdraft penalty fee levied 
against the average daily daylight overdraft incurred by the 
institution. The annual rate for the daylight overdraft penalty fee is 
equal to the annual rate applicable to the daylight overdrafts of other 
depository institutions (i.e., the rate set forth in section (I)(B)) 
plus 100 basis points, adjusted to take account of the Fedwire 
operating day (multiplied by the fraction of the day Fedwire is 
scheduled to operate). The daily daylight penalty rate is calculated by 
dividing the annual penalty rate by 360.
    The penalty fee applies to the institution's average daily daylight 
overdraft in accounts at the Federal Reserve. The average daily 
overdraft is calculated by dividing the sum of the negative Federal 
Reserve account balances at the end of each minute of the scheduled 
Fedwire operating day (with positive balances set to zero) by the total 
number of minutes in the scheduled Fedwire operating day. The penalty 
fee is charged in lieu of, not in addition to, the daylight overdraft 
fee described in section (I)(B) and is effective April 14, 1994.
    Overnight overdrafts for these institutions are treated similarly 
to overnight overdrafts of other depository institutions.
    a. Edge and agreement corporations.9 Edge and agreement 
corporations should refrain from incurring daylight overdrafts in their 
reserve or clearing accounts. In the event that any daylight overdrafts 
occur, the Edge or agreement corporation must post collateral to cover 
the overdrafts. In addition to posting collateral, the Edge or 
agreement corporation would be subject to a daylight overdraft penalty 
fee levied against the average daily daylight overdrafts incurred by 
the institution, as described above.
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    \9\These institutions are organized under section 25A of the 
Federal Reserve Act (12 U.S.C. 611-631) or have an agreement or 
undertaking with the Board under section 25 of the Federal Reserve 
Act (12 U.S.C. 601-604a).
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    This policy reflects the lack of access of these institutions to 
the discount window and the possibility that the parent of an Edge or 
agreement corporation may be unable or unwilling to cover its 
subsidiary's overdraft on a timely basis. The Board notes that the 
parent of an Edge or agreement corporation could fund its subsidiary 
during the day over Fedwire and/or the parent could substitute itself 
for its subsidiary on private networks. Such an approach by the parent 
could both reduce systemic risk exposure and permit the Edge or 
agreement corporation to continue to service its customers. Edge and 
agreement corporation subsidiaries of foreign banks are treated in the 
same manner as their domestically-owned counterparts.
    b. Bankers' banks.10 Bankers' banks are exempt from reserve 
requirements and do not have regular access to the discount window. 
They do, however, have access to Federal Reserve payments services. The 
Board's policy provides that bankers' banks should refrain from 
incurring overdrafts and post collateral to cover any overdrafts they 
do incur. In addition to posting collateral, a bankers' bank would be 
subject to a daylight overdraft penalty fee levied against the average 
daily daylight overdrafts incurred by the institution, as described 
above.
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    \1\0For the purposes of this policy statement, a bankers' bank 
is a financial institution that is not required to maintain reserves 
under the Board's Regulation D (12 CFR part 204) because it is 
organized solely to do business with other financial institutions, 
is owned primarily by the financial institutions with which it does 
business, and does not do business with the general public and is 
not a depository institution as defined in the Board's Regulation A 
(12 CFR 201.2(a)).
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    The Board's policy for bankers' banks reflects the need to protect 
Reserve Banks from potential losses resulting from daylight overdrafts 
incurred by bankers' banks. The policy also reflects the fact that some 
bankers' banks do not incur the costs of maintaining reserves as do 
other depository institutions and do not have regular access to the 
discount window and the similarity between overdrafts and discount 
window credit.
    Bankers' banks may voluntarily waive their exemption from reserve 
requirements, thus gaining access to the discount window. Such bankers' 
banks would be free to establish caps and would be subject to the same 
policy as other depository institutions. The policy set out in this 
section applies only to those bankers' banks that have not waived their 
exemption from reserve requirements.
    c. Limited-purpose trust companies.10A The Federal Reserve Act 
permits the Board to grant Federal Reserve membership to limited-
purpose trust companies subject to conditions the Board may prescribe 
pursuant to the Act. As a general matter, member limited-purpose trust 
companies do not accept reservable deposits, do not have regular 
discount window access, and may not incur daylight overdrafts.
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    \1\0AFor the purposes of this policy statement, a limited-
purpose trust company is a trust company that is a member of the 
Federal Reserve System but that does not meet the definition of 
``depository institution'' in section 19(b)(1)(A) of the Federal 
Reserve Act (12 U.S.C. 461(b)(1)(A)).
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    Limited-purpose trust companies are subject to the same daylight 
overdraft penalty fees as other institutions that do not maintain 
reserves and do not have regular discount window access. Limited-
purpose trust companies should refrain from incurring overdrafts and 
should post collateral to cover any overdrafts they do incur. In 
addition to posting collateral, a limited-purpose trust company would 
be subject to a daylight overdraft penalty fee levied against the 
average daily daylight overdrafts incurred by the institution, as 
described above.
    d. Zero-cap depository institutions. Some depository institutions 
have caps of zero that are imposed by Reserve Banks because of the 
institutions' financially troubled status or failure to comply with the 
Board's payments system risk policy or because the institution itself 
requested a zero cap. Regardless of whether it has access to the 
discount window, if a depository institution on which a Reserve Bank 
has imposed, or that has adopted, a zero cap incurs a funds-transfer-
related overdraft, the Reserve Bank would counsel the institution and 
may monitor the institution's activity in real-time and reject or pend 
any Fedwire funds transfer instruction that would cause an overdraft. 
Because the timing of book-entry securities transfers are not fully 
within the control of the receiving depository institution, the Board 
will allow depository institutions with caps of zero that have access 
to the discount window to continue to incur book-entry overdrafts, but 
will require that such overdrafts be collateralized even if they are 
infrequent and modest.
    By order of the Board of Governors of the Federal Reserve System, 
February 17, 1994.
Jennifer J. Johnson,
Associate Secretary of the Board.
[FR Doc. 94-4131 Filed 2-23-94; 8:45 am]
BILLING CODE 6210-01-P