[Federal Register Volume 59, Number 211 (Wednesday, November 2, 1994)]
[Notices]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27122]


[[Page Unknown]]

[Federal Register: November 2, 1994]


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FEDERAL RESERVE SYSTEM

[Docket No. R-0806]

 

Policy Statement on Payment System Risk

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
has approved a modification to its Policy Statement on Payment System 
Risk regarding net debit caps. Specifically, the Board has approved 
that the multiple associated with the de minimis net debit cap be 
doubled from 20 to 40 percent of risk-based capital. In addition, the 
Board approved administrative counseling flexibility for institutions 
that continue to exceed their net debit caps due to the posting of non-
Fedwire transactions. Under this flexibility, the Reserve Banks will 
work with affected institutions on means of avoiding daylight 
overdrafts, but will not subject these institutions to routine 
counseling for daylight overdrafts.

EFFECTIVE DATE: October 13, 1994.

FOR FURTHER INFORMATION CONTACT: Jeffrey C. Marquardt, Assistant 
Director (202/452-2360), Paul Bettge, Manager (202/452-3174), Division 
of Reserve Bank Operations and Payment Systems, Board of Governors of 
the Federal Reserve System. For the hearing impaired only, 
Telecommunication Device for the Deaf (TDD), Dorothea Thompson (202/
452-3544).

SUPPLEMENTARY INFORMATION: The Board has established a Payment System 
Risk Policy Statement pursuant to its authority under the Federal 
Reserve Act. 12 U.S.C. 221 et seq. In October 1993, the Federal Reserve 
implemented a set of intraday posting rules for debits and credits 
affecting depository institution accounts with Reserve Banks. The 
posting rules provide for the posting of non-Fedwire transactions at 
specific times during the day, in addition to the posting of Fedwire 
funds and securities transfers as they occur throughout the day. In 
contrast, according to the posting rules that were in effect prior to 
last October, non-Fedwire payments for each depository institution were 
netted and, if a net credit resulted, the amount was posted to the 
institution's Federal Reserve account as of the opening of business 
and, if a net debit, as of the close of business.
    Prior to implementation of the new posting rules, about 200 
institutions, on average, exceeded their daylight overdraft caps during 
any given two-week reserve maintenance period. Immediately following 
implementation of the new posting rules, this number increased to 
between 1200 and 1500 institutions per period. In anticipation of this 
increase, the Board adopted a ``transition period'' for routine 
administrative counseling in order to provide institutions with a 
period of time to implement changes to their Federal Reserve account 
management procedures in order to reduce the incidence of daylight 
overdrafts in excess of daylight overdraft caps. Following nearly one 
year of ``transition,'' about 750 to 800 institutions per period still 
typically exceed their caps.
    The new posting rules were intended, in large part, to support the 
assessment of daylight overdraft fees, which began on April 14, 1994. 
The posting rules were developed by the Board over a three-year period 
and included two separate requests for public comment.
    In developing the new posting rules, four general principles were 
established. First, the intraday posting rules were designed not to 
generate intraday float. The old posting rules typically created 
approximately $30 billion in intraday float. Second, the new posting 
rules were to permit depository institutions to anticipate precisely 
when transactions would be posted to their account. Under the old 
posting rules, an institution would not know until after the close of 
business whether the net of all non-Fedwire activity was a credit or a 
debit and, accordingly, whether the netted amount would be posted as of 
the opening or closing of business. Third, the posting rules were 
designed to be consistent with the legal rights and responsibilities of 
depository institutions. Under this principle, check debits would not 
be posted to an institution's account prior to presentment of the 
checks. Finally, the new posting rules were intended to be 
competitively neutral. That is, neither the Reserve Banks nor private 
sector providers of correspondent banking services should be 
artificially advantaged by the new posting rules.
    Under these principles, the debit to an institution for any payment 
is posted at the same time as the credit is posted to the account of 
the counterparty to the transaction. The exception to this guideline is 
for check transactions where, by virtue of the nature of check 
processing, it is not possible to match debits and credits on a 
transaction-by-transaction basis throughout the day. In addition, 
because checks should not be debited prior to presentment, a single 
time for all check debits and credits would necessarily be later in the 
day than many depository institutions believed appropriate. Therefore, 
debits for checks presented to depository institutions are posted on 
the next clock hour at least one hour following presentment, beginning 
at 11:00 a.m., Eastern Time. Credits for check deposits are either 
posted (1) at a single, float-weighted posting time or (2) at multiple 
times throughout the day, beginning at 11:00 a.m., Eastern Time, using 
a set of fractions that are based upon Reserve Bank check collection 
experience. For check credits, depository institutions are permitted to 
select either option, based upon which alternative best meets their 
needs. Currently, the earliest float-weighted posting time (Option 1), 
which enables an institution to have full use of check deposit credits, 
is 11:45 a.m. Eastern Time.
    On average over a day, these check posting rules result in a 
minimal amount of intraday check float. At specific points in time 
during the day, however, the check posting rules appear to be giving 
rise to as much as $20 billion in ``credit float,'' whereby the Reserve 
Banks have posted debits to depository institution accounts prior to 
providing corresponding credits on check transactions to other 
institutions. The impact of this float, and the measured daylight 
overdrafts it creates, appears to be falling primarily on smaller 
depository institutions.
    Under the old posting rules, smaller institutions seldom incurred 
significant daylight overdrafts and, thus, were able to make use of the 
``exempt from filing'' or ``de minimis'' daylight overdraft caps 
without incurring a significant number of cap breaches. Under the new 
posting rules, however, on average over four recent reserve maintenance 
periods, 600 of the 775 total institutions with daylight overdrafts in 
excess of their caps were institutions that had ``exempt from filing'' 
or ``de minimis'' daylight overdraft caps. An additional 159 
institutions with a zero net debit cap had cap breaches.
    The ``exempt from filing'' cap permits an institution to incur 
daylight overdrafts up to the lesser of $10 million or 20 percent of 
risk-based capital. The exempt cap does not require any action by the 
board of directors of the depository institution or the filing of any 
documentation with its Reserve Bank. As additional flexibility, an 
exempt-from-filing institution may incur up to two daylight overdrafts 
in two consecutive two-week reserve maintenance periods before it is in 
violation of the Board's payments system risk (PSR) policy.1 In 
order to incur higher daylight overdrafts, an institution may file a 
resolution of its board of directors requesting a de minimis cap, which 
permits daylight overdrafts up to 20 percent of risk-based capital. To 
be permitted even larger amounts of intraday credit, up to 2.25 times 
risk-based capital on a single day, the institution must undertake a 
self-assessment of creditworthiness, intraday funds management and 
control, and customer credit policies and controls to support a higher 
daylight overdraft cap.

    \1\For institutions with other net debit cap categories, any 
daylight overdraft that exceeds the net debit cap would be subject 
to administrative counseling by the Reserve Banks.
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    An institution that regularly exceeds its cap is subject to 
progressively higher levels of administrative counseling by its Reserve 
Bank. Under current guidelines, a depository institution that continues 
to exceed its daylight overdraft cap ultimately may be assigned a zero 
cap and be placed on the real-time monitor. In this situation, a 
depository institution will be prevented from originating Fedwire funds 
transfers that would cause, or increase, a daylight overdraft.
    The Board's policy on daylight overdraft caps is intended to 
address intraday risk to the Federal Reserve arising from daylight 
overdrafts. However, most non-Fedwire activity poses primarily 
interday, rather than intraday, risk. Escalated counseling, including 
real-time monitoring, for non-Fedwire-caused daylight overdrafts may be 
of limited usefulness in reducing these overdrafts. In addition, most 
of the daylight overdrafts caused by implementation of the new posting 
rules would not result in the assessment of daylight overdraft charges, 
owing to the deductible permitted in computing such charges.
    Current alternatives available to a depository institution to 
address the situation where it routinely exceeds its daylight overdraft 
cap include: (1) filing for a ``self-assessment'' cap, (2) shifting 
funding patterns or delaying the origination of funds transfers, (3) 
selecting the ``fractional'' check posting option in order to begin 
receiving some check credits earlier than the single, float-weighted 
posting time, (4) having check debits posted to the account of a 
correspondent bank, or (5) transferring payment processing business to 
a private correspondent bank. It should be noted that filing for a 
self-assessment cap is an alternative available only to financially 
healthy institutions and presents an increased administrative burden to 
these institutions. In addition, many of the small institutions 
adversely affected by the posting rules have a limited amount of 
Fedwire funds transfer activity. Thus adjustments to such Fedwire 
activity may have a minimal impact on such institutions' level of 
daylight overdrafts. Similarly, a correspondent bank may be unable to 
provide funding to respondents earlier in the day without adversely 
affecting its own daylight overdraft position.

Alternatives

     The Board considered three alternatives to address cap breaches 
attributable to the changes in the intraday posting rules for non-
Fedwire activity: (1) increasing the size of the multiples associated 
with daylight overdraft net debit caps, (2) adopting, on a permanent 
basis, counseling flexibility for daylight overdrafts caused by non-
Fedwire activity, or (3) changing the posting rules. Each of these 
alternatives is discussed below.

Caps

    The Board analyzed various scenarios to determine whether the level 
of exempt-from-filing or de minimis cap categories could be increased 
without materially increasing risk to Reserve Banks. An increase in the 
exempt-from-filing daylight overdraft cap category would require no 
action on the part of a depository institution, with a potentially 
substantial percentage increase in intraday credit to be granted to 
that depository institution by the Federal Reserve. The Board believes 
that any increase in the size of caps, without a self-assessment, 
should be made in the de minimis cap, which requires the filing of a 
board of directors' resolution. This approach will ensure that senior 
bank management and directors are aware of the potential amount of 
credit that may be obtained by the depository institution from the 
Federal Reserve during the day.
    In studying increases in cap levels, the Board was mindful of the 
existing structure of cap categories that require a self-assessment. 
For example, an ``average'' cap permits daylight overdrafts, on average 
over a reserve maintenance period, up to 75 percent of an institution's 
risk-based capital. In order not to diminish the relevance of an 
``average'' cap, which can be obtained by an institution only after 
conducting a full self-assessment, the Board believes the cap multiple 
for the de minimis cap should not approach 75 percent.
    At a level of 40 percent of risk-based capital, however, between 85 
and 90 percent of cap breaches by institutions that currently have 
exempt or de minimis caps would be eliminated, assuming certain exempt-
from-filing institutions file a board of directors' resolution adopting 
a de minimis cap. Diminishing reductions in cap breaches by 
institutions with exempt and de minimis caps are achieved with cap 
levels beyond 40 percent, with an associated lessening of the relative 
benefits of a self-assessed cap. Cap levels below 40 percent do not 
yield a sufficient reduction in cap breaches to warrant any increase at 
all in the level of the de minimis cap.
    It should be noted that any increase in the size of net debit caps, 
in addition to providing capacity to cover current cap breaches caused 
by the posting rules, would also increase the intraday capacity for 
daylight overdrafts resulting from irrevocable Fedwire funds and book-
entry securities transfers. The Board believes that, for the most part, 
institutions with a de minimis net debit cap have a relatively limited 
amount of Fedwire activity and an increase in daylight overdraft 
capacity will likely not increase significantly the risk exposure of 
the Reserve Banks. Moreover, Reserve Banks have special procedures in 
place for dealing with risks posed by depository institutions in poor 
or deteriorating financial condition. The Board has, therefore, 
approved an increase in the multiple associated with the de minimis net 
debit cap from 20 percent to 40 percent of risk-based capital.

Counseling

    As noted above, the Reserve Banks administratively counsel 
depository institutions that exceed their caps. For cap categories 
other than the exempt-from-filing category, any daylight overdrafts in 
excess of a depository institution's cap are subject to counseling by 
the Reserve Banks. For institutions with an exempt cap, however, only 
when an institution incurs three or more daylight overdrafts in excess 
of its cap within a four-week period would it be subject to counseling. 
The Board reviewed this frequency measure to determine whether an 
increase may be feasible.
    By increasing the number of permissible daylight overdrafts in 
excess of the exempt cap from two in two consecutive two-week reserve 
maintenance periods to four in two consecutive two-week reserve 
maintenance periods, 79 percent of the institutions with exempt-from-
filing caps that had cap breaches would not be subject to counseling by 
their Reserve Banks. A significant concern with increasing the 
permissible occurrences of cap breaches, however, is that there is 
currently no size limitation on the size of those cap breaches. The 
Board also believes that increases in the number of non-counselable 
daylight overdrafts effectively increases the amount of intraday credit 
that may be used by an institution. Should the Federal Reserve decide 
to increase the amount of intraday credit to be extended to depository 
institutions, the Board believes it would be preferable to identify 
such an increase clearly through an increase in the size of a cap, 
rather than an increase in the number of permissible excess daylight 
overdrafts.
    Another approach to minimize the administrative burden of 
counseling on both depository institutions and the Reserve Banks is to 
exempt daylight overdrafts caused either by check transactions or all 
non-Fedwire transactions from counseling. The Board believes, however, 
that separate treatment under the PSR policy of different types of 
payment transactions is not desirable. For example, daylight overdrafts 
caused by book-entry securities transfers and ACH transactions were 
initially excluded from counseling under the PSR policy. The Board 
decided in 1992 that all transactions should be treated alike for 
daylight overdraft measurement purposes. In addition, counseling 
institutions for some daylight overdrafts and not for others may lead 
to confusion, both within the Reserve Banks and at depository 
institutions.
    Nonetheless, some degree of counseling flexibility may be 
appropriate. As noted above, the Reserve Banks have had in place since 
October 1993 a policy of administering daylight overdraft counseling on 
a flexible basis, depending upon whether cap breaches were attributable 
to the new posting rules. Continued counseling flexibility appears to 
be desirable largely in dealing with institutions that have a zero 
daylight overdraft net debit cap as well as relatively small 
institutions that, by the nature of their business, will continue to 
exceed a positive net debit cap even after appropriate adjustments have 
been made. These institutions may have few alternatives for eliminating 
non-Fedwire daylight overdrafts. The institutions that have zero caps 
for reasons related to their financial condition are typically already 
on the real-time monitor in reject or pend mode. In addition, in some 
cases, zero cap institutions are also required by the Reserve Banks to 
prefund certain payments or collateralize any daylight overdrafts. 
Routinely counseling such institutions for overdrafts caused by non-
Fedwire transactions lessens the credibility of the daylight overdraft 
counseling program and appears to do little to lessen the actual risk 
to Reserve Banks. The Board has approved such administrative counseling 
flexibility on an on-going basis.

Posting Procedures

    Modifications to the intraday posting procedures would be another 
way to address the frequency of cap breaches by small depository 
institutions. The Board believes any such modifications should be 
carefully weighed. The check posting rules were adopted by the Board 
following a lengthy process involving two requests for public comment 
and many discussions with the banking industry, as noted above. For 
example, the principle of the elimination of intraday float for checks 
was specifically addressed through public comment in 1989. The new 
posting rules have now been in place about one year and it is possible 
that institutions may still be adapting to those rules. In addition, 
changes to these rules after such a short period of time may impose 
unanticipated costs associated with changing computer programs on a 
large number of depository institutions.
    Further changes to the check posting rules may also lead to the 
creation of intraday float. As an example, a scheme whereby check 
credits are posted at 11:00 a.m. Eastern Time and check debits continue 
to be posted on the clock hour at least one hour following presentment 
would generate as much as $23 billion in debit float at 11:00 a.m., and 
an average of $6 billion in float over the course of the day. However, 
even this radical a change to the posting rules would not eliminate a 
significant fraction of cap breaches caused by the implementation of 
the new posting rules. Many non-Fedwire-caused cap breaches would 
continue due to the posting of ACH debit transactions, at 11:00 a.m. 
Eastern Time, and net settlement entries from private clearing houses, 
as determined by the individual settlement arrangements. Many small 
depository institutions may continue to encounter difficulties in 
funding these transactions on a timely basis during the day.
    Another possible change to the check posting rules would be to 
shift the first check debiting time from 11:00 a.m., Eastern Time to 
11:00 a.m., Local Time. It was initially believed that such an approach 
might make the fractional check crediting option more feasible for many 
institutions in the Central, Mountain, and Pacific time zones. Upon 
further analysis, however, the Board determined that because of the 
later debiting times in western time zones, the corresponding crediting 
times would shift later in the day as well, thereby lessening any 
positive benefit of the delayed check debits.
    A final alternative is to establish a new set of posting rules for 
cap administration different from the posting rules for the assessment 
of daylight overdraft fees. The Board does not believe such an approach 
would be desirable, as it would likely lead to more, rather than less, 
of an administrative burden on small institutions and could create a 
significant amount of confusion in the banking industry about the focus 
of the PSR initiative.
    The Board has, therefore, not elected to make any changes to the 
established intraday posting procedures at this time.

    By order of the Board of Governors of the Federal Reserve System, 
October 27, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-27122 Filed 11-1-94; 8:45am]
BILLING CODE 6210-01-P