[Federal Register Volume 66, Number 108 (Tuesday, June 5, 2001)]
[Notices]
[Pages 30198-30199]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13977]



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FEDERAL RESERVE SYSTEM

[Docket No. R-1106]


Policy Statement on Payments System Risk Interaffiliate Transfers

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Policy statement.

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SUMMARY: The Board is rescinding section I.F., entitled Interaffiliate 
Transfers, of its payments system risk (PSR) policy. The Board adopted 
the interaffiliate transfer policy in 1987 to address potential risks 
resulting from a lack of an arm's-length credit decision among 
affiliates.

EFFECTIVE DATE: January 1, 2002.

FOR FURTHER INFORMATION CONTACT: Paul Bettge, Associate Director (202/
452-3174) or Stacy Coleman, Manager (202/452-2934), Division of Reserve 
Bank Operations and Payment Systems.

SUPPLEMENTARY INFORMATION: The Board is issuing this notice in 
conjunction with five other notices requesting comment on the PSR 
policy. Three near-term proposals concern the net debit cap calculation 
for U.S. branches and agencies of foreign banks (Docket No. R-1108), 
modifications to the procedures for posting electronic check 
presentments to depository institutions' Federal Reserve accounts for 
purposes of measuring daylight overdrafts (Docket No. R-1109), and the 
book-entry securities transfer limit (Docket No. R-1110). In addition, 
the Board is requesting comment on the benefits and drawbacks to 
several potential longer-term changes to the Board's policy, including 
lowering self-assessed net debit caps, eliminating the two-week average 
caps, implementing a two-tiered pricing system for collateralized and 
uncollateralized daylight overdrafts, and rejecting payments with 
settlement-day finality that would cause an institution to exceed its 
daylight overdraft capacity level (Docket No. R-1111). The Board is 
also issuing today an interim policy statement and requesting comment 
on the broader use of collateral for daylight overdraft purposes 
(Docket No. R-1107). Furthermore, to reduce burden associated with the 
PSR policy, the Board recently rescinded the third-party access policy 
(Docket No. R-1100).

I. Background

    In April 1985, the Board adopted the PSR policy to reduce the risks 
that large-dollar payments systems presented to the Federal Reserve 
Banks, to the banking system, and to other sectors of the economy (50 
FR 21120, May 22, 1985). An integral component of this policy is a 
program to control the use of intraday Federal Reserve credit, commonly 
referred to as daylight overdrafts. The PSR policy establishes maximum 
limits (net debit caps) on daylight overdrafts in depository 
institutions' accounts at Federal Reserve Banks.
    At the time it adopted the PSR policy, the Board also explored 
allowing depository institutions affiliated through common holding 
company ownership to consolidate their Fedwire activity and net debit 
caps for the purpose of monitoring compliance with the PSR policy. The 
Board determined, however, that while the operations of some holding 
companies are centrally managed, the regulatory and supervisory 
framework within which their subsidiaries operate is based on the 
separate corporate charter of each subsidiary. Therefore, the PSR 
policy requires that depository institutions be monitored for 
compliance on a separate legal-entity basis.
    Although the Board prohibited affiliated depository institutions 
from outright consolidation of their Fedwire activity and net debit 
caps, a depository institution could simulate consolidation by sending 
Fedwire funds transfers to an affiliated institution in amounts not to 
exceed its net debit cap. The institution would have to repay the funds 
before the end of the day. The Board, however, identified two potential 
risks associated with depository institutions transferring their net 
debit caps to affiliated institutions: Increased credit risk to the 
Federal Reserve Banks and systemic risk among affiliated depository 
institutions, resulting from a lack of an arm's-length relationship 
among affiliates. The Board believed that this lack of an arm's-length 
relationship among affiliates, in some cases, might weaken the 
independence of credit judgment exercised by one affiliate in advancing 
funds to another. The concern that common ownership erodes an arm's-
length credit decision grew out of the bank failures in the 1930s, 
which pointed to the relationship between depository institutions and 
their affiliates as a source of instability for the depository 
institutions.\1\
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    \1\ In addition, the Basle Committee's Core Principles requires 
that transactions between banks and related companies and 
individuals should be on an arm's length basis, be effectively 
monitored, and appropriate steps should be taken to mitigate risks. 
Core Principles for Effective Banking Supervision, Basle Committee 
on Banking Supervision, September 1997.
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    To address these risks, the Board modified the PSR policy in 1987 
to permit interaffiliate transfers that are intended to concentrate the 
daylight overdraft capacity of affiliated institutions in one or more 
institutions provided that: (1) Each sending institution's board of 
directors specifically approves, at least once each year, the intraday 
extension of credit to the specified affiliate(s) and sends a copy of 
the directors' resolution to its Federal Reserve Bank and (2) during 
regular examination, each sending institution's primary federal 
supervisor reviews the timeliness of board-of-directors resolutions, 
the establishment by the institution of limits on credit extensions to 
each affiliate, the establishment by the institution of controls to 
ensure that credit extensions stay within such limits, and whether 
credit extensions have in fact stayed within those limits (52 FR 29255, 
August 6, 1987).

II. Discussion

    Recognizing that significant changes have occurred in the banking, 
payments, and regulatory environment in the past few years, the Board 
decided to conduct a broad review of the Federal Reserve's daylight 
credit policies. As part of its review, the Board considered the 
effectiveness of the interaffiliate transfer policy. Because of the 
policy's limited use and the credit risk management techniques 
available to the Reserve Banks, the Board decided to rescind the 
policy.
    The Board evaluated the interaffiliate transfer policy's 
effectiveness and found that very few institutions are using 
interaffiliate transfers to consolidate their Fedwire activity and 
daylight overdraft capacity. The Board also notes that those 
institutions engaging in interaffiliate transfers, primarily insured 
depository institutions owned by the same bank holding company, appear 
to be managing their Federal Reserve accounts prudently. In addition, 
subsequent to the adoption of the interaffiliate transfer policy, the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989 
included a cross-guarantee provision that allows the Federal Deposit 
Insurance Corporation (FDIC) to recover part of its resolution cost by 
seeking reimbursement from affiliated institutions.\2\ The Board notes 
that, under the cross-guarantee provisions, an insured depository 
institution is generally liable for any loss incurred by the FDIC in 
connection with the default of a commonly controlled insured depository 
institution. Furthermore, the Federal Reserve Banks retain the right to 
reduce or eliminate the credit exposure that they will accept for any 
depository

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institution by reducing the institution's net debit cap or monitoring 
the institution's Fedwire funds transfers and enhanced net settlement 
transactions in real time. The Board believes that these controls 
mitigate any increased credit risk to the Federal Reserve or systemic 
risk from interaffiliate transfers intended to simulate daylight 
overdraft cap consolidation.
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    \2\ 12 U.S.C. 1468.
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    The Board also believes that any institution-specific supervisory 
concerns associated with interaffiliate credit extensions are more 
appropriately addressed through the existing supervisory process, 
including through regulatory restrictions on interaffiliate 
transactions embodied in sections 23A and 23B of the Federal Reserve 
Act.\3\ Sections 23A and 23B of the Federal Reserve Act are intended to 
limit the risks to an insured depository institution from transactions 
with its affiliates. In May 2001, the Board published an interim final 
rule that (1) requires, under section 23A, that institutions establish 
and maintain policies and procedures to manage the credit exposure 
arising from the institutions' intraday extensions of credit to 
affiliates and (2) clarifies that intraday extensions of credit by an 
insured depository institution to an affiliate are subject to the 
market terms requirement of section 23B (Docket No. R-1104).
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    \3\ 12 U.S.C. 371c.
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    The Board notes that the interim rule under sections 23A and 23B 
could restrict the ability of depository institutions to consolidate 
their daylight overdraft caps. Because of statutory exemptions, 
however, the market terms requirement of section 23B and the policies 
and procedures requirement of the interim rule generally would not 
apply to intraday credit extensions between affiliated insured 
depository institutions. Thus, intraday credit extensions between 
affiliated depository institutions, including the consolidating 
transfers discussed above, would generally be permissible under 
sections 23A and 23B provided they are conducted in a safe and sound 
manner. On the other hand, intraday credit extensions designed to 
transfer the daylight overdraft cap of an insured depository 
institution to an affiliate that is not an insured depository 
institution, such as a branch or agency of a foreign bank affiliate, 
would be subject to the market terms requirement of section 23B and the 
policies and procedures requirement of the interim rule.
    Because the risks addressed by the interaffiliate transfer policy 
are appropriately addressed through the existing supervisory process, 
the Board is rescinding the interaffiliate transfer policy, part I, 
section F of the Policy Statement on Payments System Risk.\4\ Upon 
rescission of the interaffiliate transfer policy, depository 
institutions will no longer be required to submit a board-of-directors 
resolution to their Reserve Banks; however, institutions are expected 
to comply with supervisory and regulatory requirements regarding 
affiliate relationships and exposures, including sections 23A and 23B, 
as described in 12 CFR 250.248, 12 CFR Part 223, and any future 
rulemaking.
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    \4\ The current part I, section G of the policy, Monitoring, 
will be designated as section F.

    By order of the Board of Governors of the Federal Reserve 
System, May 30, 2001.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 01-13977 Filed 6-4-01; 8:45 am]
BILLING CODE 6210-01-P