[Federal Register Volume 86, Number 105 (Thursday, June 3, 2021)]
[Notices]
[Pages 29776-29787]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-11649]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1749]


Potential Modifications to the Federal Reserve Policy on Payment 
System Risk To Expand Access to Collateralized Intraday Credit, Clarify 
Access to Uncollateralized Credit, and Support the Deployment of the 
FedNow Service

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice; request for comment.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is requesting comment on proposed changes to part II of the Federal 
Reserve Policy on Payment System Risk (PSR policy) that would expand 
access to collateralized intraday credit from the Federal Reserve Banks 
(Reserve Banks) and clarify the eligibility standards for accessing 
uncollateralized intraday credit from Reserve Banks. These proposed 
changes build upon the revisions to the PSR policy adopted in 2008 and 
implemented in 2011, which the Board designed to improve intraday 
liquidity management and payment flows for the banking system while 
helping to mitigate the credit exposures of the Reserve Banks from 
daylight overdrafts. In addition, the Board is requesting comment on 
changes to part II of the PSR policy to support the deployment of the 
FedNowSM Service (FedNow Service). Relatedly, the Board is 
proposing to incorporate the Federal Reserve Policy on Overnight 
Overdrafts (Overnight Overdrafts policy) into the PSR policy.

DATES: Comments on the proposed changes must be received on or before 
August 2, 2021.

ADDRESSES: You may submit comments, identified by Docket No. OP-1749, 
by any of the following methods:
     Agency Website: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Email: [email protected]. Include docket 
number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Ann E. Misback, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue NW, 
Washington, DC 20551.
    All public comments are available from the Board's website at 
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, 
unless modified for technical reasons or to remove personally 
identifiable information at the commenter's request. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room 146, 1709 New York Avenue NW, Washington, DC 20006, 
between 9:00 a.m. and 5:00 p.m. on weekdays. Please make an appointment 
to inspect comments by calling (202) 452-3684.

FOR FURTHER INFORMATION CONTACT: Jason Hinkle, Assistant Director (202-
912-7805), Michelle Olivier, Lead Financial Institution Policy Analyst 
(202-452-2404), Brajan Kola, Senior Financial Institution Policy 
Analyst (202-736-5683) Division of Reserve Bank Operations and Payment 
Systems, or Evan Winerman, Senior Counsel (202-872-7578), Legal 
Division, Board of Governors of the Federal Reserve System. For users 
of Telecommunications Device for the Deaf (TDD) only, please contact 
202-263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

A. Intraday Credit in the PSR Policy

    The PSR policy is intended to foster the safety and efficiency of 
payment and settlement systems.\1\ Part II of the PSR policy governs 
the provision of intraday credit (also known as daylight overdrafts) to 
depository institutions \2\ (institutions) with accounts at the Reserve 
Banks. In particular, part II of the PSR policy outlines the methods 
used to provide intraday credit to ensure the smooth functioning of 
payment and settlement systems, while controlling credit risk to the 
Reserve Banks associated with intraday credit. To be eligible for 
intraday credit, the PSR policy requires that an institution be 
``financially healthy'' and have regular access to the discount 
window.\3\ The PSR policy also establishes limits, or ``net debit 
caps,'' on the value of an institution's daylight overdrafts.\4\ The 
Reserve Banks use an ex post system to measure daylight overdrafts in 
institutions' Federal Reserve accounts. An institution's eligibility 
for intraday credit depends on various factors including the 
institution's most recent financial and supervisory information. An 
institution's supervisory rating, as well as the ratings of its holding 
company and affiliate institutions, are key components of the process 
for determining an institution's eligibility for intraday credit.\5\
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    \1\ See https://www.federalreserve.gov/paymentsystems/psr_about.htm.
    \2\ Depository institutions include commercial banks, savings 
banks, savings and loan associations, and credit unions.
    \3\ See section II.D.1 of the PSR policy.
    \4\ Id. The size of an institution's net debit cap equals the 
institution's ``capital measure'' multiplied by its ``cap 
multiple.'' An institution's capital measure is a number derived 
from the size of its capital base. An institution's cap multiple is 
determined by the institution's cap category. Under section II.D.2 
of the PSR policy, an institution's ``cap category'' is one of six 
classifications: The three self-assessed categories (``high,'' 
``above average,'' and ``average''); ``de minimis;'' ``exempt-from-
filing;'' and ``zero.''
    \5\ To assist institutions in implementing part II of the PSR 
policy, the Federal Reserve has prepared two documents: The Overview 
of the Federal Reserve's Payment System Risk Policy on Intraday 
Credit (Overview) and the Guide to the Federal Reserve's Payment 
System Risk Policy on Intraday Credit (Guide). The Guide contains 
detailed eligibility standards for requesting and maintaining 
uncollateralized capacity.
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    In 2008, the Board approved changes to part II of the PSR policy to 
encourage greater collateralization of daylight overdrafts, recognizing 
that collateral reduces credit risk to Reserve Banks.\6\ In particular, 
the 2008 changes amended the PSR policy to state that ``the Reserve 
Banks supply intraday balances and credit predominantly through 
explicitly collateralized daylight overdrafts to healthy 
institutions.'' \7\ In addition, the Board included explicit language 
that emphasized the role of the Reserve Banks in providing intraday 
credit to institutions in order to ensure the

[[Page 29777]]

efficient and effective functioning of the payment system. The Board 
also adopted a dual-pricing framework intended to provide a financial 
incentive to institutions to collateralize their daylight overdrafts. 
Under the dual-pricing framework, Reserve Banks charge no fee for 
collateralized daylight overdrafts, but charge a fee of 50 basis points 
for uncollateralized daylight overdrafts.\8\
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    \6\ See 73 FR 79109 (December 24, 2008). These changes were not 
fully implemented until 2011.
    \7\ See section II.B of the PSR policy.
    \8\ See section II.C of the PSR policy. Collateral eligibility 
and margins are the same for PSR policy purposes as for the discount 
window. See http://www.frbdiscountwindow.org/ for information on the 
discount window and PSR collateral acceptance policy and collateral 
margins.
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    In addition to incentivizing institutions to collateralize their 
daylight overdrafts, the PSR policy allows institutions that might 
otherwise be constrained by their uncollateralized net debit caps to 
request collateralized capacity under the ``maximum daylight overdraft 
capacity'' (max cap) program.\9\ Under the program, an institution's 
max cap equals its uncollateralized net debit cap plus its additional 
collateralized capacity.\10\
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    \9\ Section II.E of the PSR policy notes that max caps are 
``intended to provide extra liquidity through the pledge of 
collateral by the few institutions that might otherwise be 
constrained from participating in risk-reducing payment system 
initiatives.''
    \10\ See section II.E of the PSR policy. When the Board 
initially adopted the max cap program in 2001, it recognized that 
collateral helps reduce risk to Reserve Banks and the public sector. 
See 66 FR 64419, 64423 (December 13, 2001) (``The Board believes 
that requiring collateral allows the Federal Reserve to protect the 
public sector from additional credit risk while providing extra 
liquidity to the few institutions that might otherwise be 
constrained.'').
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    Although the PSR policy's dual-pricing framework encourages 
institutions to collateralize their daylight overdrafts, collateralized 
capacity under the max cap program is not currently an option for 
institutions with lower levels of intraday capacity. Institutions that 
select the ``exempt'' or ``de minimis'' net debit cap categories (which 
do not require a self-assessment) are ineligible to request 
collateralized capacity under the max cap program. Likewise, 
institutions with a voluntary zero net debit cap, and institutions that 
the Reserve Banks have assigned a zero net debit cap because of their 
account management or financial condition, cannot request 
collateralized capacity under the max cap program.
    Further, obtaining collateralized capacity under the max cap 
program requires certain administrative steps from and analysis by 
requesting institutions. First, institutions must provide a business 
case outlining their need for collateralized capacity, and must submit 
a board of directors resolution approving the collateralized capacity 
at least annually and whenever the institution modifies the amount of 
requested collateralized capacity.\11\ Second, the max cap program is 
limited to institutions that have already adopted a self-assessed net 
debit cap, which requires an institution to perform a self-assessment 
of its creditworthiness, intraday funds management and control, 
customer credit policies and controls, and operating controls and 
contingency procedures.\12\
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    \11\ Section II.E.2 of the PSR policy allows U.S. branches or 
agencies of foreign banking organizations (FBOs) to use a 
streamlined procedure for requesting a max cap. An FBO that uses the 
streamlined procedure is not required to provide a business case for 
a max cap, nor is it required to obtain a board of directors 
resolution authorizing a max cap, so long as (a) the FBO has an FBO 
PSR capital category of ``highly capitalized,'' and (b) the 
requested total capacity is 100 percent or less of the FBO's 
worldwide capital times the self-assessed cap multiple. See section 
II.D.2 and n. 63 of the PSR policy for a discussion of FBO PSR 
capital categories.
    \12\ See section II.D.a of the PSR policy and n. 4, supra, which 
discuss cap categories. The high, above average, and average cap 
categories require a self-assessment.
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    In proposing the changes discussed below, the Board recognizes that 
the extension of intraday credit to institutions on a collateralized 
basis generally poses less risk to the Reserve Banks and the payment 
system than the extension of intraday credit on an uncollateralized 
basis. As such, the removal of some restrictions on access to 
collateralized intraday credit could improve the effectiveness of 
Reserve Bank intraday credit as a liquidity tool without a significant 
increase in credit risk to the Reserve Banks and the payment system.

B. FedNow Service and the PSR Policy

    In 2020, the Board approved the FedNow Service, a new 24x7x365 
real-time gross settlement service with clearing functionality to 
support end-to-end instant retail payments in the United States.\13\ 
The FedNow Service will settle funds transfers between FedNow Service 
participants \14\ through debit and credit entries to balances in 
master accounts held at the Reserve Banks. The new service will provide 
an infrastructure to promote ubiquitous, safe, and efficient instant 
retail payments in the United States. The FedNow Service will enable 
credit transfers that support a range of different types of payments 
for individuals and businesses, and will support the transfer of 
supplemental information, such as invoices, related to a payment.
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    \13\ See ``Service Details on Federal Reserve Actions to Support 
Interbank Settlement of Instant Payments,'' 85 FR 48522 (August 11, 
2020), available at https://www.federalregister.gov/documents/2020/08/11/2020-17539/service-details-on-federal-reserve-actions-to-support-interbank-settlement-of-instant-payments. The FedNow Service 
will be available to customers in 2023 and further details on the 
timeframe for launch will be announced through established Reserve 
Bank channels once additional work is completed. See also ``Federal 
Reserve updates FedNowSM Service launch to 2023,'' 
(February 2, 2021), available at https://frbservices.org/news/press-releases/020221-federal-reserve-updates-fednow-service-launch-to-2023.html.
    \14\ The term ``FedNow Service participants'' encompasses those 
participating institutions that use the FedNow Service to send 
instant payments involving end users as well as institutions that 
may only use the FedNow LMT (described below) to make funds 
transfers for liquidity management purposes to other FedNow Service 
participants. The term ``end users'' encompasses individuals and 
businesses.
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    The PSR policy currently aligns the calculation of daylight 
overdrafts and the ``business day'' with the scheduled operating day 
for the Fedwire Funds Service.\15\ The FedNow Service will have a 24-
hour business day, each day of the week, including weekends and 
holidays. The close of the FedNow Service will align on all calendar 
days with the close of the Fedwire Funds Service.\16\ If the close of 
the Fedwire Funds Service is extended on any given day, the close of 
the FedNow Service will also be extended to maintain alignment. Given 
the continuous, 24-hour nature of the FedNow Service, the opening time 
will occur immediately after the close of the FedNow Service. In 
addition, the Reserve Banks will implement a seven-day accounting 
regime as part of implementing the FedNow Service. Under this 
framework, an end-of-day balance will be calculated for each day of the 
week, with transactions occurring on weekends and holidays recorded and 
reported in the same way as transactions occurring Monday through 
Friday.\17\ End-of-day balances will be reported on Federal Reserve 
accounting records for each FedNow Service participant on each business 
day.
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    \15\ The Fedwire Funds Service closes at 7:00:59 p.m. ET and re-
opens for the next business day at 9:00 p.m. See 84 FR 71940 
(December 30, 2019) and 85 FR 61747 (September 30, 2020). The 
schedule for funds transfers through Fedwire Funds is provided in 
the Reserve Banks' Operating Circular 6.
    \16\ 85 FR 48522, 48531. Both the Fedwire Funds and the FedNow 
Services will close at 7:00:59 p.m. ET. On weekends and holidays, 
when the Fedwire Funds Service is closed, the FedNow Service close 
will still align with this closing time.
    \17\ The Board expects that participating institutions will 
record FedNow Service transactions in their customer accounts 
according to their own business day and accounting conventions 
(while still providing immediate access to funds received through 
the FedNow Service).
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    Access to intraday credit will be available on a 24x7x365 basis to 
FedNow Service participants, including those that use the FedNow 
Service to send instant payments involving end

[[Page 29778]]

users or that use a liquidity management tool within the service 
(FedNow LMT) to make funds transfers to other FedNow Service 
participants.\18\ Access to 24x7x365 intraday credit will support the 
smooth functioning of the FedNow Service (including FedNow LMT).
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    \18\ 85 FR 48522, 48531-32. The FedNow LMT will enable 
participants in the FedNow Service to transfer funds between one 
another to support liquidity needs related to payment activity in 
the FedNow Service. The tool will also be available to support 
participants in private-sector instant payment services backed by 
joint accounts at a Reserve Bank by enabling transfers between the 
master accounts of such participants and their joint account. The 
FedNow LMT will be available during specific hours, for example, 
when such transfers are not currently possible through other Reserve 
Bank services. Controls related to the FedNow LMT, service terms, 
eligibility requirements, enrollment processes, and hours of 
availability will be announced prior to the launch of the FedNow 
Service through established Reserve Bank communication channels.
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C. Overnight Overdrafts Policy

    Intraday overdrafts occur when an institution has a negative 
balance in its Federal Reserve account during the Fedwire Funds Service 
operating day. Overnight overdrafts occur when an institution has a 
negative account balance at the end of the Fedwire Funds Service 
operating day. While the PSR policy addresses daylight overdrafts, the 
Overnight Overdrafts policy addresses overnight overdrafts.
    To minimize Reserve Bank exposure to overnight overdrafts, the 
Overnight Overdrafts policy imposes a penalty fee to discourage 
institutions from incurring overnight overdrafts.\19\ If an institution 
has a negative balance at the end of the business day, Reserve Banks 
apply an overnight overdraft penalty for a 24-hour period. Currently, 
the penalty fee includes a multiday charge for overnight overdrafts 
over weekends and holidays. The penalty fee increases by one percentage 
point for each overnight overdraft after an institution's third 
overnight overdraft in a rolling 12-month period.
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    \19\ See Board of Governors of the Federal Reserve System, 
``Policy on Overnight Overdrafts,'' (Effective July 12, 2012). 
Available at https://www.federalreserve.gov/paymentsystems/oo_policy.htm. The overnight overdraft penalty rate is equal to the 
primary credit rate plus 4 percentage points (annual rate). There is 
also a minimum penalty fee of 100 dollars per occasion, regardless 
of the amount of the overnight overdraft.
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II. Discussion of Proposed Changes

    The Board is proposing to modify the PSR policy to expand access to 
collateralized capacity and reduce the administrative steps associated 
with requesting collateralized capacity. With these proposed changes, 
the Board intends to improve intraday liquidity management and payment 
flows while assisting the Reserve Banks in managing intraday credit 
risk. The proposed changes also seek to clarify the terms for accessing 
uncollateralized intraday credit and the circumstances under which an 
institution may remain eligible for uncollateralized capacity if its 
holding company or affiliate is assigned a low supervisory rating.
    Additionally, the Board is proposing changes to the PSR policy and 
the Overnight Overdrafts policy to align these policies with the 
deployment of the FedNow Service and a 24x7x365 payment environment. 
Relatedly, the Board is proposing to incorporate the Overnight 
Overdrafts policy as part III of the PSR policy in order to reflect the 
close relationship between daylight overdrafts and overnight overdrafts 
in an institution's account.
    The Board is also proposing several technical changes and 
corrections to the PSR policy. These changes are not substantive in 
nature and reflect current practices that the Reserve Banks use to 
administer the PSR policy.
    While the Board is collectively requesting comment on the proposed 
changes discussed below, the proposed changes may become effective at 
different times. The Board intends for the FedNow Service-related 
changes to the PSR policy and the Overnight Overdrafts policy to come 
into effect when the Reserve Banks begin processing transactions 
associated with the FedNow Pilot Program.\20\
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    \20\ See ``Federal Reserve announces FedNowSM Pilot 
Program Participants,'' (January 24, 2021), available at https://www.frbservices.org/news/press-releases/012521-federal-reserve-announces-fednow-pilot-program-participants.html.
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A. Access to Collateralized Capacity

    As noted above, while the PSR policy incentivizes collateralization 
of daylight overdrafts, an institution requesting collateralized 
capacity above its net debit cap must provide a business case outlining 
its need and must submit an annual board of directors resolution 
approving its collateralized capacity. Additionally, collateralized 
capacity under the max cap program is available only to institutions 
that have first completed a self-assessment. The Board is proposing 
amendments to the PSR policy that would expand access to collateralized 
capacity and reduce the administrative steps associated with requesting 
collateralized capacity.
1. Expanding Access To Collateralized Capacity
    The Board proposes to amend section II.E of the PSR policy to 
expand the pool of institutions eligible to request collateralized 
capacity. Specifically, while the max cap program is currently limited 
to institutions with self-assessed net debit caps,\21\ the Board is 
proposing to expand the max cap program by allowing institutions with a 
cap category of ``zero,'' ``exempt,'' or ``de minimis'' to request 
collateralized capacity from their Reserve Banks. A domestic 
institution would be eligible to request collateralized capacity if its 
Prompt Corrective Action (PCA) designation \22\ is 
``undercapitalized,'' ``adequately capitalized,'' or ``well 
capitalized.'' Similarly, a U.S. branch or agency of a foreign banking 
organization (FBO) would be eligible to request collateralized capacity 
if its FBO PSR capital category \23\ is ``undercapitalized,'' 
``sufficiently capitalized,'' or ``highly capitalized.''
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    \21\ Reserve Banks would require that an institution remain 
financially healthy and be eligible for regular access to the 
discount window to qualify for a max cap.
    \22\ 12 U.S.C. 1831o.
    \23\ See section II.D.2 of the PSR policy.
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    So long as an institution remains at least ``undercapitalized,'' 
the institution would remain eligible to request collateralized 
intraday credit under the max cap program--even if the institution, the 
holding company, or an affiliate has a ``fair,'' ''marginal,'' or 
``unsatisfactory'' supervisory rating.\24\ Given the important role 
that collateral plays in reducing credit risk to Reserve Banks, the 
Board believes that the eligibility criteria for requesting 
collateralized capacity should be less restrictive than the criteria 
for accessing uncollateralized capacity. As a result, some institutions 
that are not eligible to establish a positive net debit cap would be 
eligible for collateralized capacity.\25\ The Board believes that these 
proposed changes would provide institutions greater flexibility in 
managing intraday credit, would assist institutions with liquidity and 
risk-management planning, and would not materially increase credit risk 
to Reserve Banks.
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    \24\ Domestic institutions with a PCA designation of 
``significantly undercapitalized'' or ``critically 
undercapitalized'' would not be eligible to request collateralized 
intraday credit under the max cap program. Similarly, FBOs with an 
FBO PSR capital category of ``intraday credit ineligible'' would not 
be eligible to request collateralized intraday credit under the max 
cap program.
    \25\ Section II.B, infra, describes proposed changes to the 
Board's standards for requesting and maintaining uncollateralized 
capacity.
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2. Reducing Administrative Steps
    The Board is proposing to simplify the process for requesting and 
maintaining collateralized capacity under the max cap program. Under 
the current general procedure for requesting a max cap, an institution 
requesting collateralized capacity must provide a

[[Page 29779]]

business case outlining its need for collateralized capacity and must 
submit an annual board of directors resolution approving its 
collateralized capacity. The Board believes that simplifying this 
process would encourage more institutions to obtain collateralized 
capacity, which could promote further collateralization of daylight 
overdrafts.
    The Board is proposing to eliminate, in most circumstances, the 
requirement that institutions provide a written business case to their 
Reserve Banks when requesting collateralized capacity under the max cap 
program. Specifically, the Board proposes that an institution would 
need to provide a written business case only if (1) the institution's 
requested max cap exceeds the institution's capital measure multiplied 
by 2.25, which is the cap multiple associated with the ``High'' self-
assessed cap category,\26\ or (2) the Reserve Bank exercises discretion 
to require that the institution submit a business case due to recent 
developments in the institution's condition.
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    \26\ See n. 4, supra, for a discussion of cap categories and cap 
multiples.
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    The Board is also proposing to eliminate the requirement that an 
institution's board of directors submit an annual resolution approving 
requests for collateralized capacity. Instead, the Board proposes that 
an institution's board of directors would need to provide a resolution 
only when the institution initially requests collateralized capacity. 
Once a Reserve Bank has approved an institution's collateralized 
capacity, the collateralized capacity would generally remain in place, 
without the need for further action by the institution, so long as the 
institution remains at least ``undercapitalized.'' An institution would 
need to submit a resolution from its board of directors if the 
institution requests an increase to its previously approved 
collateralized capacity.
    An institution's collateralized capacity, on any given day, will 
continue to equal the value of collateral the institution has pledged 
to the Reserve Bank, not to exceed the difference between the 
institution's max cap and its net debit cap.\27\ An institution seeking 
to increase its max cap by pledging additional collateral to its 
Reserve Bank must request and receive approval from its Reserve Bank. 
The Board is not proposing any other changes to the process for 
obtaining collateralized capacity under the max cap program.
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    \27\ See n. 74 of the PSR policy.
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B. Clarifying Access To Uncollateralized Capacity

    The Board is proposing to amend section II.D of the PSR policy to 
clarify the terms under which institutions would be eligible to 
maintain access to their uncollateralized intraday credit capacity. 
Currently, the PSR policy does not detail when an institution can 
request and maintain uncollateralized capacity; it states only that 
``[a]n institution must be financially healthy and have regular access 
to the discount window in order to adopt a net debit cap greater than 
zero.'' \28\ Separately, however, the Board's Guide to the PSR policy 
establishes more detailed eligibility standards for requesting and 
maintaining uncollateralized capacity. The Board is proposing to 
simplify these eligibility standards and incorporate them directly into 
the PSR policy.
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    \28\ See section II.D.1 of the PSR policy. Institutions that may 
pose special risks to the Federal Reserve, such as those that are 
not eligible for regular access to the discount window, those 
incurring daylight overdrafts in violation of the Federal Reserve's 
PSR policy, or those in weak financial condition, are generally 
assigned a zero cap.
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    The Board proposes to clarify in the PSR policy that an 
institution's eligibility to adopt and maintain a positive net debit 
cap depends on an assessment of its creditworthiness, which results 
from the institution's (1) PCA designation or FBO PSR capital 
category,\29\ and (2) most recent supervisory ratings. Specifically, 
the Board would incorporate into the PSR policy the following table to 
clarify when institutions can request a positive net debit cap.
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    \29\ See section II.D.2 of the PSR policy. Reserve Banks use 
information primarily from the Capital and Asset Report for Foreign 
Banking Organizations (FR Y-7Q) in order to determine an 
institution's FBO PSR capital category. U.S. branches and agencies 
of FBOs based in jurisdictions that have not implemented capital 
standards substantially consistent with those established by the 
Basel Committee on Banking Supervision would be eligible to request 
any of the net debit cap categories, but the Reserve Banks would 
require that such institutions perform a full assessment of 
creditworthiness if the FBO requests a self-assessed or de minimis 
net debit cap. Reserve Banks may require a full assessment of 
creditworthiness if such FBOs are requesting an exempt-from-filing 
cap.

                          Eligibility Criteria for Requesting a Positive Net Debit Cap
----------------------------------------------------------------------------------------------------------------
                                                              Supervisory rating \63\
 Domestic capital category/ FBO  -------------------------------------------------------------------------------
      PSR capital category                                                                        Marginal or
                                        Strong           Satisfactory            Fair           unsatisfactory
----------------------------------------------------------------------------------------------------------------
Well capitalized/Highly           Eligible..........  Eligible..........  Eligible..........  Ineligible (Zero
 capitalized.                                                                                  net debit cap).
Adequately capitalized/           Eligible..........  Eligible..........  Eligible..........  Ineligible (Zero
 Sufficiently capitalized.                                                                     net debit cap).
Undercapitalized................  May be eligible     May be eligible     Ineligible (Zero    Ineligible (Zero
                                   subject to a full   subject to a full   net debit cap).     net debit cap).
                                   assessment of       assessment of
                                   creditworthiness.   creditworthiness.
Significantly or critically       Ineligible (Zero    Ineligible (Zero    Ineligible (Zero    Ineligible (Zero
 undercapitalized/Intraday         net debit cap).     net debit cap).     net debit cap).     net debit cap).
 credit ineligible.
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    As noted in the eligibility criteria, an institution requesting a 
``high,'' ``above average,'' or ``average'' net debit cap, must perform 
a self-assessment of its creditworthiness, intraday funds management 
and control, customer credit policies and controls, and operating 
controls and contingency procedures. The Board proposes to clarify in 
the PSR policy that, if an institution seeks a self-assessed net debit 
cap, it would be ineligible for a positive net debit cap if its self-
assessment results in the lowest possible rating for any one of the 
four components of the self-assessment in the Guide.
    The Board is also proposing revisions to the PSR policy that would 
clarify the impact of an institution's holding company's or affiliate's 
supervisory

[[Page 29780]]

rating on the institution's eligibility for a positive net debit cap. 
Currently, an institution can lose its net debit cap if its holding 
company or affiliate receives a low (marginal or unsatisfactory) 
supervisory rating. The Board proposes that, if an institution's 
holding company or affiliate is assigned a low supervisory rating,\30\ 
the institution would be eligible to request the exempt, de minimis, or 
average cap categories but would not be eligible to request the above 
average or the high self-assessed cap categories. Additionally, Reserve 
Banks will assign an institution a zero net debit cap if supervisory 
information of the holding company or affiliated institutions reveals 
material operating or financial weaknesses that pose significant risks 
to an institution.
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    \30\ For this purpose, a low supervisory rating for a holding 
company would include a Deficient-2 rating in any of the components 
of the Large Financial Institution (LFI) rating system or an RFI 
rating of 4 or 5. A low supervisory rating for an affiliate 
institution would be defined as a CAMELS rating of 4 or 5.
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    The Board believes that the proposed change would provide greater 
certainty to institutions and would allow the Reserve Banks to tailor 
intraday credit access in response to supervisory developments.

C. Changes To Support the Deployment of the FedNow Service

    The Board is proposing changes to the PSR policy and the Overnight 
Overdrafts policy to align these policies with the deployment of the 
FedNow Service. The proposed changes would modify the PSR policy to 
address changes associated with a 24x7x365 payment environment. 
Currently, intraday credit is available only during the Fedwire Funds 
Service operating day. The Board recognizes that access to 24x7x365 
intraday credit would support the smooth functioning of the FedNow 
Service. Accordingly, the Reserve Banks will offer intraday credit on a 
24x7x365 basis to all FedNow Service participants, including those that 
use the FedNow Service to send instant payments between end users and 
users of the FedNow LMT.\31\ The Reserve Banks will assess daylight 
overdraft fees on FedNow Service participants seven days a week, 
including weekends and holidays. Institutions that settle the FedNow 
activity of respondents in their master accounts as correspondent banks 
will be assessed daylight overdraft fees, and therefore will need to 
manage their account balances to cover respondents' FedNow activity, 
even if those correspondents do not directly use the FedNow Service.
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    \31\ See 85 FR 48522, 48531-32. Intraday credit on a 24x7x365 
basis will also be available to support participants in a private-
sector instant payment service backed by a joint account at a 
Reserve Bank by enabling transfers between the master accounts of 
those participants and the joint account.
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    Reserve Banks expect that FedNow Service participants will manage 
their master accounts in compliance with Federal Reserve policies. As 
described further below, FedNow Service participants will need to avoid 
negative balances at the close of the business day. Negative balances 
not cured by the end of the business day result in overnight 
overdrafts.
1. Definition of ``Business Day''
    The Board is proposing to revise section II.A of the PSR policy to 
define the ``business day'' as the 24-hour duration beginning 
immediately after the previous day's regularly-scheduled close of the 
Fedwire Funds Service and the FedNow Service, and ending with the 
regularly-scheduled close of the Fedwire Funds Service and the FedNow 
Service.\32\ The next business day would begin immediately after the 
scheduled close of the Fedwire Funds Service and the FedNow Service.
---------------------------------------------------------------------------

    \32\ The business day will align on all calendar days with the 
regularly scheduled close of the Fedwire Funds and the FedNow 
Service at 7:00:59 p.m. ET. On weekends and holidays, when the 
Fedwire Funds Service is closed, the end of the business day would 
align with the close of the FedNow Service and the regularly 
scheduled close time of the FedNow Service. The next business day 
would begin at 7:01:00 p.m. ET.
---------------------------------------------------------------------------

    Given the continuous, 24-hour nature of the FedNow Service, the 
opening of the FedNow Service will occur immediately after close. 
Because FedNow Service participants will have access to intraday credit 
on a 24-hour basis, the Board believes that daylight overdrafts should 
be based on a 24-hour business day for all institutions.
2. Daylight Overdraft and Penalty Fee Calculations
    The Board is proposing to revise the daylight overdraft and the 
penalty fee calculations for all institutions in order to reflect the 
24-hour business day. Currently, the daylight overdraft fee is 
calculated using an annual rate of 50 basis points that is prorated to 
the scheduled duration of the Fedwire Funds operating day.\33\ The 
Board is proposing to change section II.C of the PSR policy so that the 
daylight overdraft fee would be based on the 24-hour business day. Due 
to this proposed change, the effective annual overdraft rate would 
continue to be 50 basis points, but the effective daily daylight-
overdraft rate would increase from 0.0000127 under the 22-hour business 
day to 0.0000138 under the 24-hour business day.\34\
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    \33\ The Fedwire operating day is currently 22 hours, the 
effective annual rate is (22/24) multiplied by 50 basis points, or 
approximately 0.004583, and the effective daily daylight-overdraft 
rate based on a 360-day year is (0.004583/360), or 0.0000127.
    \34\ Under a 24-hour business day, the effective annual 
daylight-overdraft rate would be (24/24) multiplied by 50 basis 
points, or 0.0050, and the effective daily daylight-overdraft rate 
on a 360-day year would be (.0050/360), or 0.0000138.
---------------------------------------------------------------------------

    Similarly, the Board is proposing to adjust the penalty rate for 
overdrafts under section II.F of the PSR policy to reflect the 24-hour 
business day.\35\ The annual rate used to determine the daylight-
overdraft penalty fee is currently equal to the annual rate applicable 
to the daylight overdrafts of other institutions (50 basis points) plus 
100 basis points, prorated to the length of the scheduled Fedwire Funds 
operating day. The 150-basis point penalty rate applied to the 24-hour 
business day would increase the effective daily penalty rate slightly, 
from 0.0000381 under a 22-hour business day to 0.0000416 under the 24-
hour business day.\36\
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    \35\ Certain institutions are subject to a daylight-overdraft 
penalty fee levied against the average daily daylight overdraft 
incurred by the institution. These include Edge and agreement 
corporations, bankers' banks that are not subject to reserve 
requirements, and limited-purpose trust companies.
    \36\ Under a 22-hour business day, the effective annual 
daylight-overdraft penalty rate is (22/24) multiplied by 150 basis 
points, or 0.002778, and the effective daily daylight-overdraft 
penalty rate on a 360-day year is (.002778/360), or truncated to 
0.0000381. Under a 24-hour business day, the effective annual 
daylight-overdraft penalty rate will be (24/24) multiplied by 150 
basis points, or 0.0150, and the effective daily daylight-overdraft 
penalty rate on a 360-day year would be (0.0150/360), or 0.0000416.
---------------------------------------------------------------------------

    An institution's daily daylight overdraft charge (or penalty 
charge) equals the effective daily rate multiplied by the institution's 
average daily uncollateralized daylight overdraft, which is calculated 
by dividing the sum of its negative uncollateralized Federal Reserve 
account balance at the end of each minute by the total number of 
minutes in the relevant business day. Currently, the relevant business 
day for this purpose is the Fedwire Funds operating day (1320 minutes 
under the 22-hour operating day). Under the proposal, the total number 
of minutes in the relevant business day will increase to 1440 to 
reflect the 24-hour business day. The increase in the length of the 
relevant business day from 22 hours to 24 hours will offset in part the 
increase to the effective daily rate. After accounting for changes to 
the fee rates and the average uncollateralized daylight overdraft 
calculation, the Board estimates that gross fees before application of 
fee waivers would increase by less than 0.4 percent with

[[Page 29781]]

the move from a 22-hour business day to a 24-hour business day.\37\
---------------------------------------------------------------------------

    \37\ Analysis assumes that the size and duration of 
institutions' daylight overdrafts remains unchanged between a 22-
hour and 24-hour operating day. Institutions' gross daily daylight 
overdraft fees are summed across a two-week reserve maintenance 
period and then reduced by a fee waiver of $150, which is primarily 
intended to minimize the burden of the PSR policy on institutions 
that use small amounts of intraday credit.
---------------------------------------------------------------------------

3. New Posting Rule for FedNow Funds Transfers
    The Board is proposing to add a new posting rule in section II.A of 
the PSR policy to clarify that, for purposes of measuring daylight 
overdrafts, debits and credits to an institution's master account for 
funds transfers over the FedNow Service, including FedNow LMT 
transfers, would post to an institution's account balance as they are 
processed throughout the 24-hour business day. In this way, debits and 
credits to an institution's master account related to transfers over 
the FedNow Service would be treated equivalently to debits and credits 
related to transfers over the Fedwire Funds Service, Fedwire Securities 
Service, and the National Settlement Service.
4. Posting Certain Transactions at the Regularly Scheduled Close of the 
Business Day
    Currently, section II.A of the PSR policy identifies several 
transaction types that are processed earlier in the day but ``[p]ost 
after the close of Fedwire Funds Service.'' \38\ The Board is proposing 
to revise this posting rule so that these specific transactions would 
post at the regularly scheduled close of the Fedwire Funds Service and 
the FedNow Service before the next business day begins. Posting these 
transactions at the regularly scheduled close of the Fedwire Funds 
Service and the FedNow Service would ensure that an institution's 
account balance is updated before the next business day begins 
(immediately after the regularly scheduled close of the Fedwire Funds 
Service and the FedNow Service).
---------------------------------------------------------------------------

    \38\ Currently, there are various transactions that post after 
the close of Fedwire Funds, including currency and coin shipments; 
noncash collection; term-deposit settlements; Federal Reserve Bank 
checks presented after 3:00 p.m. eastern time but before 3:00 p.m. 
local time; foreign check transactions; small-dollar credit 
corrections and adjustments; term deposit settlements; and all debit 
corrections and adjustments. Discount-window loans and repayments 
are normally posted after the close of Fedwire as well; however, in 
unusual circumstances, a discount window loan may be posted earlier 
in the day with repayment 24 hours later, or a loan may be repaid 
before it would otherwise become due.
---------------------------------------------------------------------------

    The Board is also proposing to clarify that Fedwire Funds Service 
and FedNow Service transactions occurring during extensions of the 
Fedwire Funds Service and the FedNow Service would be backdated so that 
they post at the regularly scheduled close of the Fedwire Funds and the 
FedNow Service and not at the end of the extended hours. As a result, a 
funds transfer occurring during an extension of the Fedwire Funds 
Service and the FedNow Service would post to an institution's account 
before the next regularly scheduled business day begins.\39\ This 
practice would ensure that Reserve Banks monitor daylight overdrafts 
based on a consistent 24-hour business day even on days when the 
Fedwire Funds and the FedNow Service are extended.
---------------------------------------------------------------------------

    \39\ The Reserve Banks will continue to use an ex post system to 
measure daylight overdrafts in institutions' Federal Reserve 
accounts. As an example, if the close of the Fedwire Funds Service 
and the FedNow Service is extended from the regularly scheduled 
close of 7:00:59 p.m. ET to 7:30:59 p.m. ET, a transaction occurring 
at 7:10 p.m. ET, would post at 7:00 p.m. ET for purposes of 
measuring daylight overdrafts.
---------------------------------------------------------------------------

5. Changes to the Policy on Overnight Overdrafts
    The Board is proposing to incorporate the Overnight Overdrafts 
policy as part III of the PSR policy. The Board believes that 
incorporating the Overnight Overdrafts policy into the PSR policy would 
underscore the close relationship between daylight overdrafts and 
overnight overdrafts.
    The Board is also proposing modifications to simplify the Overnight 
Overdrafts policy and align the Overnight Overdrafts policy with the 
deployment of the FedNow Service. The Board is proposing that all 
institutions would continue to be charged an overnight overdraft 
penalty fee rate equal to the primary credit rate plus 4 percentage 
points (annual rate) if its Federal Reserve account has a negative 
balance at the end of the scheduled business day--that is, at the 
regularly scheduled close of the FedNow Service.
    Currently, the penalty fee includes a multiday charge for overnight 
overdrafts over weekends and holidays. FedNow Service participants that 
incur an overnight overdraft before a weekend or holiday will have the 
opportunity to achieve a positive balance before the close of business 
day on a Saturday, Sunday, or holiday. Accordingly, the Board proposes 
that a FedNow Service participant would not automatically incur a 
multiday charge for an overnight overdraft before a weekend or holiday. 
However, institutions that are not FedNow Service participants and 
incur an overnight overdraft before a weekend or holiday will not have 
the opportunity to achieve a positive balance before the end of the 
weekend or holiday. Accordingly, these institutions would automatically 
incur a multiday charge for an overnight overdraft before a weekend or 
holiday.
    The Board is proposing to eliminate the fee-escalation feature in 
the Overnight Overdrafts policy for all institutions. The current 
Overnight Overdrafts policy includes a fee-escalation feature where the 
penalty fee for an overnight overdraft increases by one percentage 
point for each overnight overdraft after an institution has already 
experienced three overnight overdrafts in a rolling 12-month period. 
The escalation feature is rarely triggered since overnight overdrafts 
are uncommon. Additionally, Reserve Banks have other risk-mitigation 
tools for institutions that incur frequent overnight overdrafts. For 
example, Reserve Banks can counsel institutions that incur overnight 
overdrafts (by letter or phone) and, when necessary, can escalate the 
counseling to an institution's senior management. Reserve Banks also 
have discretion to remove an institution's access to intraday credit. 
Accordingly, the Board believes that maintaining the fee-escalation 
feature once the FedNow Service launches would add unnecessary 
complexity to the Overnight Overdrafts policy and would not 
meaningfully reduce risk to the Reserve Banks.

D. Technical Changes to Text of the PSR Policy

    The Board is also proposing technical changes to the PSR policy. 
First, the Board proposes to revise a sentence in footnote 61 of the 
PSR policy, which states that, for purposes of the PSR policy, the 
Reserve Banks evaluate U.S. branches and agencies of an FBO as a family 
``because these entities have no existence separate from the FBO.'' The 
Board proposes to amend this provision to state that, because U.S. 
branches and agencies are part of a single FBO family, all the U.S. 
offices of FBOs (excluding U.S.-chartered bank subsidiaries and U.S.-
chartered Edge subsidiaries) should be treated as a consolidated family 
relying on the FBO's capital.
    Second, the Board proposes to revise a sentence in footnote 76 of 
the PSR policy, which discusses the streamlined procedure that highly 
capitalized FBOs can use to request a max cap. The amendment would 
clarify that the streamlined procedure is available to

[[Page 29782]]

``highly capitalized'' FBOs, not ``well capitalized'' FBOs.\40\
---------------------------------------------------------------------------

    \40\ Generally, the ``highly capitalized'' FBO capital category 
corresponds to the ``well capitalized'' PCA designation for domestic 
institutions. See n. 63 of the PSR policy.
---------------------------------------------------------------------------

III. Request for Comment

    The Board is seeking comment on all aspects of the proposed 
changes. The Board also requests comment on the following specific 
questions:
    1. Would the proposed changes help to clarify the conditions for 
maintaining access to intraday credit for purposes of your 
institution's liquidity planning and risk management efforts?
    2. If the Board were to adopt the proposed simplifications to the 
procedure for requesting a max cap, should the Board eliminate the 
existing streamlined process for FBOs to request a max cap in section 
II.E.2 of the PSR policy? If not, how would FBOs continue to benefit 
from the streamlined process in section II.E.2?
    3. Should the supervisory ratings of an institution's holding 
company and affiliate(s) continue, as proposed, to be key factors in a 
Reserve Bank's evaluation of whether an institution is eligible for 
uncollateralized intraday credit?

IV. Regulatory Flexibility Act

    Congress enacted the Regulatory Flexibility Act (RFA) (5 U.S.C. 601 
et seq.) to address concerns related to the effects of agency rules on 
small entities, and the Board is sensitive to the impact its rules may 
impose on small entities. The RFA requires agencies either to provide 
an initial regulatory flexibility analysis with a proposed rule or to 
certify that the proposed rule will not have a significant economic 
impact on a substantial number of small entities. While the Board does 
not believe that the proposed changes would have a significant impact 
on small entities, and regardless of whether the RFA applies to the PSR 
policy per se, the Board has nevertheless prepared the following 
Initial Regulatory Flexibility analysis in accordance with 5 U.S.C. 
603. The Board requests public comments on all aspects of this 
analysis.
    1. Statement of the need for, objectives of, and legal basis for, 
the proposed rule.
    Section 11(j) of the Federal Reserve Act \41\ authorizes the Board 
to oversee the Reserve Banks' provision of intraday credit to Reserve 
Bank account holders. The Board is issuing this proposal to better 
align the PSR policy with the Board's objectives to reduce the reliance 
of the banking industry on uncollateralized intraday credit while 
ensuring the smooth operation of payment and settlement systems. The 
Board is also proposing changes that would support the deployment of 
the FedNow Service.
---------------------------------------------------------------------------

    \41\ 12 U.S.C. 248(j).
---------------------------------------------------------------------------

    2. Small entities affected by the proposed rule. Pursuant to 
regulations issued by the Small Business Administration (SBA) (13 CFR 
121.201), a ``small entity'' includes an entity that engages in 
commercial banking and has assets of $600 million or less (NAICS code 
522110). As of January 2021, nearly 3,200 institutions that maintain 
Federal Reserve accounts are small entities. Approximately 3,000 of 
those institutions maintain positive net debit caps. However, none of 
these institutions currently have a max cap. The proposal would only 
affect those entities, regardless of size, that choose to request 
additional collateralized capacity beyond their uncollateralized net 
debit cap. The proposed changes would clarify, but would not alter, 
institutions' eligibility to request and maintain net debit caps.
    3. Projected reporting, recordkeeping, and other compliance 
requirements. The proposed changes would alter the procedures by which 
institutions obtain collateralized intraday credit from the Reserve 
Banks. As described above, the proposed changes would expand access to 
collateralized capacity, and would simplify and reduce the 
administrative steps associated with obtaining and keeping 
collateralized capacity. If an institution requests collateralized 
capacity for the first time or requests an increase in its 
collateralized capacity, it would need to submit a resolution from its 
board of directors. Generally, an institution would not need to provide 
a business case justifying its request for collateralized capacity, nor 
would it need to obtain a self-assessed net debit cap before it can 
request collateralized capacity.
    4. Identification of duplicative, overlapping, or conflicting 
Federal rules. The Board has not identified any Federal rules that 
duplicate, overlap with, or conflict with the proposed changes to the 
PSR policy.
    5. Significant alternatives. The Board does not believe that 
alternatives to the proposed changes would better accomplish the 
objectives of limiting credit risk to the Reserve Banks while 
minimizing the economic impact on small entities, but the Board 
welcomes comments on potential alternatives.

V. Competitive Impact Analysis

    When considering changes to an existing service, the Board conducts 
a competitive impact analysis to determine whether there will be a 
direct and material adverse effect on the ability of other service 
providers to compete effectively with the Federal Reserve in providing 
similar services due to differing legal powers or the Federal Reserve's 
dominant market position deriving from such legal differences.\42\ The 
Board believes that there would be no adverse effects to other service 
providers resulting from the proposed changes to the PSR policy and the 
Overnight Overdrafts policy. While the proposed changes could provide 
institutions with additional collateralized intraday credit in their 
Federal Reserve accounts, as well as access to uncollateralized 
intraday credit on a 24x7x365 basis, institutions could use this credit 
to fund payments activity using private-sector or Reserve Bank 
services, at their discretion.
---------------------------------------------------------------------------

    \42\ See The Federal Reserve in the Payments System (issued 
1984; revised 1990), Federal Reserve Regulatory Service 9-1558.
---------------------------------------------------------------------------

VI. Paperwork Reduction Act

    In accordance with section 3512 of the Paperwork Reduction Act of 
1995 (44 U.S.C. 3501-3521) (PRA), the Board may not conduct or sponsor, 
and a respondent is not required to respond to, an information 
collection unless it displays a currently valid Office of Management 
and Budget (OMB) control number. The OMB control number is 7100-0217. 
The Board reviewed the PSR policy changes it is considering under the 
authority delegated to the Board by the OMB. Comments are invited on:
    (a) Whether the collections of information are necessary for the 
proper performance of the agencies' functions, including whether the 
information has practical utility;
    (b) The accuracy of the estimates of the burden of the information 
collections, including the validity of the methodology and assumptions 
used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collections on 
respondents, including through the use of automated collection 
technique or other forms of information technology; and
    (e) Estimates of the capital or start-up costs and costs of 
operation, maintenance, and purchase of services to provide 
information.
    All comments will become a matter of public record. Comments on 
aspects of this notice that may affect reporting, recordkeeping, or 
disclosure requirements and burden estimates

[[Page 29783]]

should be sent to the addresses listed in the ADDRESSES section of this 
document. A copy of the comments may also be submitted to the OMB desk 
officer: By mail to U.S. Office of Management and Budget, 725 17th 
Street NW, #10235, Washington, DC 20503; by facsimilie to (202) 395-
5806; or by email to: [email protected], Attention, Federal 
Banking Agency Desk Officer.

Proposed Revisions, With Extension for Three Years, of the Following 
Information Collection

    (1) Title of Information Collection: Annual Report of Net Debit 
Cap.
    Agency Form Number: FR 2226.
    OMB Control Number: 7100-0217.
    Frequency of Response: Annually.
    Respondents: Institutions' boards of directors.
    Abstract: Federal Reserve Banks collect these data annually to 
provide information that is essential for their administration of the 
Board's Payment System Risk (PSR) policy. The reporting panel includes 
all financial institutions with access to the discount window that are 
eligible to request intraday credit. The Report of Net Debit Cap 
comprises three resolutions, which are filed by an institution's board 
of directors depending on its needs. The first resolution is used to 
establish a de minimis net debit cap and the second resolution is used 
to establish a self-assessed net debit cap.\43\ The third resolution is 
used to establish simultaneously a self-assessed net debit cap and 
maximum daylight overdraft capacity.
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    \43\ Institutions use these two resolutions to establish a 
capacity for daylight overdrafts above the lesser of $10 million or 
20 percent of the institution's capital measure. Financially-healthy 
U.S. chartered institutions that rarely incur daylight overdrafts in 
excess of the lesser of $10 million or 20 percent of the 
institution's capital measure do not need to file board of directors 
resolutions or self-assessments with their Reserve Bank.
---------------------------------------------------------------------------

    Current Actions: Currently, institutions with a self-assessed net 
debit cap may file the third resolution in order to obtain 
collateralized capacity under the max cap program. The proposed changes 
to the PSR policy would expand access to collateralized capacity under 
the max cap program to include all domestic institutions with a PCA 
designation of undercapitalized, adequately capitalized, or well 
capitalized. The proposed changes would also expand access to 
collateralized capacity under the max cap program to include all FBOs 
with an FBO PSR category of undercapitalized, sufficiently capitalized, 
or highly capitalized. Finally, the proposed changes would eliminate 
the requirements that an institution provide (i) a business case 
outlining its need for collateralized capacity and (ii) an annual board 
of directors resolution approving its collateralized capacity. In order 
the facilitate these proposed changes to the PSR policy, the third 
resolution would be amended so that an eligible institution could 
request collateralized capacity regardless of whether the institution 
has a self-assessed net debit cap. The proposed revision would not 
increase the estimated average hours per response to FR 2226 but would 
likely expand the estimated number of respondents requesting 
collateralized capacity under the max cap program.
    Estimated number of respondents: De Minimis Cap: Non-FBOs, 893 
respondents and FBOs, 18 respondents; Self-Assessment Cap: Non-FBOs, 
106 respondents and FBOs, 9 respondents; and Maximum Daylight Overdraft 
Capacity, 59 respondents.
    Estimated average hours per response: De Minimis Cap--Non-FBOs, 1 
hour and FBOs, 1.5 hour; Self-Assessment Cap--Non-FBOs, 1 hour and 
FBOs, 1.5 hours, and Maximum Daylight Overdraft Capacity, 1 hour.
    Estimated annual burden hours: De Minimis Cap: Non-FBOs, 893 hours 
and FBOs, 27 hours; Self-Assessment Cap: Non-FBOs, 106 hours and FBOs, 
13.5 hours; and Maximum Daylight Overdraft Capacity, 59 hours.
    The following portion titled ``Federal Reserve Policy on Payment 
System Risk'' will not publish in the Code of Federal Regulations.

Federal Reserve Policy on Payment System Risk

Revisions to Section II.A of the PSR Policy

    The Board proposes to revise section II.A of the PSR policy as 
follows:
A. Daylight Overdraft Definition and Measurement
    A daylight overdraft occurs when an institution's Federal Reserve 
account is in a negative position during the business day.\33\ The 
Reserve Banks use an ex post system to measure daylight overdrafts in 
institutions' Federal Reserve accounts. Under this ex post measurement 
system, certain transactions, including Fedwire funds transfers, FedNow 
funds transfers, book-entry securities transfers, and net settlement 
transactions are posted as they are processed during the business day. 
Other transactions, including ACH and check transactions, are posted to 
institutions' accounts according to a defined schedule. The following 
table presents the schedule used by the Federal Reserve for posting 
transactions to institutions' accounts for purposes of measuring 
daylight overdrafts.

----------
    \33\ For purposes of measuring daylight overdrafts, the business 
day is the 24-hour period of time that begins immediately after the 
regularly-scheduled close of the Fedwire Funds Service (on days when 
the Fedwire Funds Service is open) and the FedNow Service (on all 
days, including weekends and holidays).

Procedures for Measuring Daylight Overdrafts \34\

Opening Balance (Previous Business Day's Closing Balance)
    Post throughout the business day:

+/- FedNow funds transfers
+/- Fedwire funds transfers \35\
+/- Fedwire book-entry securities transfers
+/- National Settlement Service entries.
+ Fedwire book-entry interest and redemption payments on securities 
that are not obligations of, or fully guaranteed as to principal and 
interest by, the United States \36\
+ Electronic payments for matured coupons and definitive securities 
that are not obligations of, or fully guaranteed as to principal and 
interest by, the United States.\37\

----------
    \34\ This schedule of posting rules does not affect the 
overdraft restrictions and overdraft measurement provisions for 
nonbanks established by the Competitive Equality Banking Act of 1987 
and the Board's Regulation Y (12 CFR 225.52).
    \35\ Funds transfers that the Reserve Banks function for certain 
international organizations using internal systems other than 
payment processing systems such as Fedwire will be posted throughout 
the business day for purposes of measuring daylight overdrafts.
    \36\ The GSEs include Federal National Mortgage Association 
(Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie 
Mac), entities of the Federal Home Loan Bank System (FHLBS), the 
Farm Credit System, the Federal Agricultural Mortgage Corporation 
(Farmer Mac), the Student Loan Marketing Association (Sallie Mae), 
the Financing Corporation, and the Resolution Funding Corporation. 
The international organizations include the World Bank, the Inter-
American Development Bank, the Asian Development Bank, and the 
African Development Bank. The Student Loan Marketing Association 
Reorganization Act of 1996 requires Sallie Mae to be completely 
privatized by 2008; however, Sallie Mae completed privatization at 
the end of 2004. The Reserve Banks no longer act as fiscal agents 
for new issues of Sallie Mae securities, and Sallie Mae is not 
considered a GSE.
    The term ``interest and redemption payments'' refers to payments 
of principal,

[[Page 29784]]

interest, and redemption on securities maintained on the Fedwire 
Securities Service.
    The Reserve Banks will post these transactions, as directed by 
the issuer, provided that the issuer's Federal Reserve account 
contains funds equal to or in excess of the amount of the interest 
and redemption payments to be made. In the normal course, if a 
Reserve Bank does not receive funding from an issuer for the 
issuer's interest and redemption payments by the established cut-off 
hour of 4:00 p.m. eastern time on the Fedwire Securities Service, 
the issuer's payments will not be processed on that day.
    \37\ Electronic payments for credits on these securities will 
post according to the posting rules for the mechanism through which 
they are processed, as outlined in this policy. However, the 
majority of these payments are made by check and will be posted 
according to the established check posting rules as set forth in 
this policy.

* * * * *
    Post at the close of the Fedwire Funds Service and the FedNow 
Service \51\

+/- All other transactions. These transactions include the following: 
Currency and coin shipments; noncash collection; term-deposit 
settlements; Federal Reserve Bank checks presented after 3:00 p.m. 
eastern time but before 3:00 p.m. local time; foreign check 
transactions; small-dollar credit corrections and adjustments; term 
deposit settlements; and all debit corrections and adjustments. 
Discount-window loans and repayments are normally posted after the 
close of the Fedwire Funds Service as well; however, in unusual 
circumstances a discount window loan may be posted earlier in the day 
with repayment 24 hours later, or a loan may be repaid before it would 
otherwise become due.

----------
    \51\ The posting of transactions that occur during extensions of 
the Fedwire Funds Service and the FedNow Service will be backdated 
to the regularly scheduled close of the Fedwire Funds Service and 
the FedNow Service.

* * * * *

Revisions to Section II.C of the PSR Policy

    The Board proposes to revise section II.C, paragraphs 3 and 4 of 
the ``Federal Reserve Policy on Payment System Risk'' as follows:

C. Pricing

* * * * *
    Daylight overdraft fees for uncollateralized overdrafts (or the 
uncollateralized portion of a partially collateralized overdraft) are 
calculated using an annual rate of 50 basis points, quoted on the basis 
of a 24-hour day and a 360-day year. The effective daily rate equals 
the annual rate divided by 360.\57\ An institution's daily daylight 
overdraft charge is equal to the effective daily rate multiplied by the 
institution's average daily uncollateralized daylight overdraft.
    An institution's average daily uncollateralized daylight overdraft 
is calculated by dividing the sum of its negative uncollateralized 
Federal Reserve account balances at the end of each minute of the 
regularly scheduled business day by the total number of minutes in the 
24-hour business day. A negative uncollateralized Federal Reserve 
account balance is calculated by subtracting the unencumbered, net 
lendable value of collateral pledged from the total negative Federal 
Reserve account balance at the end of each minute. Each positive end-
of-minute balance in an institution's Federal Reserve account is set to 
equal zero. Fully collateralized end-of-minute negative balances are 
similarly set to zero.

----------
    \57\ The effective daily daylight-overdraft rate is truncated to 
0.0000138.

* * * * *

Revisions to Section II.D of the PSR Policy

    The Board proposes to revise section II.D of the ``Federal Reserve 
Policy on Payment System Risk'' as follows:
II. D. Net Debit Caps (Uncollateralized Intraday Credit Capacity)
    Each institution incurring uncollateralized daylight overdrafts in 
its Federal Reserve account must adopt a net debit cap, that is, a 
ceiling on the total uncollateralized daylight overdraft position that 
it can incur during any given day. An institution's cap category and 
capital measure determine the size of its net debit cap. Specifically, 
the net debit cap is calculated as an institution's cap multiple times 
its capital measure:

net debit cap = cap multiple x capital measure

    Cap categories and their associated cap levels, set as multiples of 
an institution's capital measure, are listed below:

                         Net Debit Cap Multiples
------------------------------------------------------------------------
               Cap category                         Cap multiple
------------------------------------------------------------------------
High......................................  2.25.
Above average.............................  1.875.
Average...................................  1.125.
De minimis................................  0.4.
Exempt-from-filing \60\...................  $10 million or 0.20.
Zero......................................  0.
------------------------------------------------------------------------
\60\ The net debit cap for the exempt-from-filing category is equal to
  the lesser of $10 million or 0.20 multiplied by the capital measure.

    Pledging collateral does not increase an institution's net debit 
cap, although certain institutions may be eligible to obtain additional 
collateralized capacity in excess of their net debit caps (see section 
II.E). For the treatment of overdrafts that exceed the net debit cap, 
see section II.G.
    While capital measures differ, the net debit cap provisions of this 
policy apply similarly to foreign banking organizations (FBOs) as to 
U.S. institutions. Consistent with practices for U.S.-chartered 
depository institutions, the Reserve Banks will advise home-country 
supervisors of the daylight overdraft capacity of U.S. branches and 
agencies of FBOs under their jurisdiction, as well as of other 
pertinent information related to the FBOs' caps. The Reserve Banks will 
also provide information on the daylight overdrafts in the Federal 
Reserve accounts of FBOs' U.S. branches and agencies in response to 
requests from home-country supervisors.
1. Eligibility
    An institution must have regular access to the discount window in 
order to adopt a net debit cap greater than zero. Granting a net debit 
cap, or any extension of intraday credit, to an institution is at the 
discretion of the Reserve Bank. As detailed in the following matrix, an 
institution's eligibility to adopt and maintain a positive net debit 
cap depends on the institution's creditworthiness as determined by (1) 
its Prompt Corrective Action (PCA) designation \61\ or FBO PSR capital 
category,\62\ and (2) the supervisory rating.

----------
    \61\ An insured depository institution is (1) ``well 
capitalized'' if it significantly exceeds the required minimum level 
for each relevant capital measure, (2) ``adequately capitalized'' if 
it meets the required minimum level for each relevant capital 
measure, (3) ``undercapitalized'' if it fails to meet the required 
minimum level for any relevant capital measure, (4) ``significantly 
undercapitalized'' if it is significantly below the required minimum 
level for any relevant capital measure, or (5) ``critically 
undercapitalized'' if it fails to meet any leverage limit (the ratio 
of tangible equity to total assets) specified by the appropriate 
federal banking agency, in consultation with the FDIC, or any other 
relevant capital

[[Page 29785]]

measure established by the agency to determine when an institution 
is critically undercapitalized (12 U.S.C. 1831o).
    \62\ The four FBO PSR capital categories for FBOs are ``highly 
capitalized,'' ``sufficiently capitalized,'' ``undercapitalized,'' 
and ``intraday credit ineligible.'' To determine whether it is 
highly capitalized or sufficiently capitalized, an FBO should 
compare its risk-based capital ratios to the corresponding ratios in 
Regulation H for well-capitalized and adequately capitalized banks. 
12 CFR 208.43(b). Additionally, an FBO must have a leverage ratio of 
4 percent or 3 percent (calculated under home-country standards) to 
qualify as, respectively, highly capitalized or sufficiently 
capitalized. To determine whether it is undercapitalized, an FBO 
would compare its risk-based capital ratios to the corresponding 
ratios in Regulation H. Additionally, an FBO would be deemed 
undercapitalized if its home-country leverage ratio is less than 3 
percent. Finally, to determine whether it is intraday credit 
ineligible, an FBO should compare its risk-based capital ratios to 
the corresponding ratios in Regulation H for significantly 
undercapitalized banks. Additionally, an FBO would be deemed 
intraday credit ineligible if its home-country leverage ratio is 
less than 2 percent.

                          Eligibility Criteria for Requesting a Positive Net Debit Cap
----------------------------------------------------------------------------------------------------------------
                                                              Supervisory rating \63\
 Domestic capital category/ FBO  -------------------------------------------------------------------------------
      PSR capital category                                                                        Marginal or
                                        Strong           Satisfactory            Fair           Unsatisfactory
----------------------------------------------------------------------------------------------------------------
Well capitalized/Highly           Eligible..........  Eligible..........  Eligible..........  Ineligible (Zero
 capitalized.                                                                                  net debit cap).
Adequately capitalized/           Eligible..........  Eligible..........  Eligible..........  Ineligible (Zero
 Sufficiently capitalized.                                                                     net debit cap).
Undercapitalized................  May be eligible     May be eligible     Ineligible (Zero    Ineligible (Zero
                                   subject to a full   subject to a full   net debit cap).     net debit cap).
                                   assessment of       assessment of
                                   creditworthiness.   creditworthiness.
Significantly or critically       Ineligible (Zero    Ineligible (Zero    Ineligible (Zero    Ineligible (Zero
 undercapitalized/Intraday         net debit cap).     net debit cap).     net debit cap).     net debit cap).
 credit ineligible.
----------------------------------------------------------------------------------------------------------------
\63\ Supervisory composite ratings, such as the Uniform Bank Rating System (CAMELS) and the RFI Rating System,
  are generally assigned on a scale from 1 to 5, with 1 being the strongest rating. Thus, a supervisory rating
  of 1 is considered Strong, a rating of 2 is considered Satisfactory, a rating of 3 is considered Fair, a
  rating of 4 is considered Marginal, and a rating of 5 is considered Unsatisfactory. An institution will not be
  eligible for uncollateralized capacity if a supervisory agency assigns a Marginal or Unsatisfactory
  supervisory rating to the institution. If an institution's holding company has been assigned a Deficient-2
  rating in any of the components of the Large Financial Institution (LFI) rating system or an RFI rating of 4
  or 5, the institution will not be eligible to request the above average and high self-assessed net debit caps
  but may be eligible for a lower net debit cap. Similarly, if an institution's affiliates are assigned a
  Marginal or Unsatisfactory supervisory rating, the institution will not be eligible to request the above
  average and high self-assessed net debit caps but may be eligible for a lower net debit cap. Reserve Banks
  will assign an institution a zero net debit cap if supervisory information of the holding company and
  affiliated institutions reveals material operating or financial weaknesses that pose significant risks to the
  institution.

    As described further in section II.D.2.a, an institution seeking to 
establish a net debit cap category of high, above average, or average 
must perform a self-assessment of its own creditworthiness, intraday 
funds management and control, customer credit policies and controls, 
and operating controls and contingency procedure. An institution that 
performs a self-assessment will be deemed ineligible for a positive net 
debit cap if its self-assessment results in the lowest possible rating 
for any one of the four components of the self-assessment process.
2. Cap Categories
* * * * *
a. Self-Assessed
    In order to establish a net debit cap category of high, above 
average, or average, an institution must perform a self-assessment of 
its own creditworthiness, intraday funds management and control, 
customer credit policies and controls, and operating controls and 
contingency procedures.\64\ For domestic institutions, the assessment 
of creditworthiness is based on the institution's supervisory rating 
and PCA designation.\65\ For U.S. branches and agencies of FBOs that 
are based in jurisdictions that have implemented capital standards 
substantially consistent with those established by the Basel Committee 
on Banking Supervision, the assessment of creditworthiness is based on 
the institution's supervisory rating and its FBO PSR capital 
category.\66\ An institution may perform a full assessment of its 
creditworthiness in certain limited circumstances--for example, if its 
condition has changed significantly since its last examination or if it 
possesses additional substantive information regarding its financial 
condition. Additionally, U.S. branches and agencies of FBOs based in 
jurisdictions that have not implemented capital standards substantially 
consistent with those established by the Basel Committee on Banking 
Supervision are required to perform a full assessment of 
creditworthiness to determine their ratings for the creditworthiness 
component. An institution performing a self-assessment must also 
evaluate its intraday funds-management procedures and its procedures 
for evaluating the financial condition of and establishing intraday 
credit limits for its customers. Finally, the institution must evaluate 
its operating controls and contingency procedures to determine if they 
are sufficient to prevent losses due to fraud or system failures. The 
Guide includes a detailed explanation of the self-assessment process.
* * * * *

----------
    \64\ This assessment should be done on an individual-institution 
basis, treating as separate entities each commercial bank, each Edge 
corporation (and its branches), each thrift institution, and so on. 
An exception is made in the case of U.S. branches and agencies of 
FBOs. Because these entities are part of a single FBO family, all 
the U.S. offices of FBOs (excluding U.S.-chartered bank subsidiaries 
and U.S.-chartered Edge subsidiaries) should be treated as a 
consolidated family relying on the FBO's capital.
    \65\ See n. 61 supra.
    \66\ See n. 62 supra.

* * * * *
d. Zero
    Some institutions that could obtain positive net debit caps choose 
to have zero caps. Often these institutions have very conservative 
internal policies regarding the use of Federal Reserve intraday credit. 
If an institution that has adopted a zero cap incurs a daylight 
overdraft, the Reserve Bank counsels the

[[Page 29786]]

institution and may monitor the institution's activity in real time and 
reject or delay certain transactions that would cause an overdraft. If 
the institution qualifies for a positive cap, the Reserve Bank may 
suggest that the institution adopt an exempt-from-filing cap or file 
for a higher cap if the institution believes that it will continue to 
incur daylight overdrafts or overdrafts in excess of its assigned cap 
limit.
    In addition, a Reserve Bank may assign an institution a zero net 
debit cap. Institutions that may pose special risks to the Reserve 
Banks, such as those without regular access to the discount window, 
those incurring daylight overdrafts in violation of this policy, those 
that are ineligible for intraday credit based on their supervisory 
rating and PCA designation/FBO PSR capital category (see section II.A), 
or those that are otherwise in weak financial condition are generally 
assigned a zero cap (see section II.F). Recently chartered institutions 
may also be assigned a zero net debit cap.
    Certain institutions with zero caps, including institutions that 
have been involuntarily assigned a zero cap by a Reserve Bank, may be 
eligible to request collateralized capacity from their Reserve Bank 
(see sections II.E). * * *
* * * * *

Revisions to Section II.E of the PSR Policy

    The Board proposes to revise section II.E of the ``Federal Reserve 
Policy on Payment System Risk'' as follows:

E. Collateralized Intraday Credit Capacity

    Subject to the approval of its administrative Reserve Bank, an 
eligible institution may pledge collateral to secure collateralized 
daylight overdraft capacity in addition to uncollateralized capacity 
from its net debit cap.\74\ The resulting combination of 
uncollateralized and collateralized capacity is known as the maximum 
daylight overdraft capacity (max cap) and is defined as follows:

maximum daylight overdraft capacity = net debit cap + collateralized 
capacity.\75\

    Once approved, the Reserve Bank will monitor the institution to 
ensure that it does not exceed its max cap. Pledging less collateral 
reduces an institution's effective maximum daylight overdraft capacity 
level, but pledging more collateral does not increase the maximum 
daylight overdraft capacity above the approved max cap level.
1. Eligibility
    An institution that wishes to expand its daylight overdraft 
capacity by pledging collateral should consult with its administrative 
Reserve Bank. A domestic institution is eligible to request 
collateralized intraday credit if its PCA designation is 
``undercapitalized,'' ``adequately capitalized,'' or ``well 
capitalized.'' \76\ Similarly, an FBO is eligible to request 
collateralized intraday credit if its FBO PSR capital category is 
``undercapitalized,'' ``sufficiently capitalized,'' or ``highly 
capitalized.'' \77\ Provided that it meets these capitalization 
requirements, an institution is eligible to request collateralized 
capacity even if the institution is not eligible to adopt a positive 
net debit cap (see section II.D.1).

----------
    \74\ The administrative Reserve Bank is responsible for the 
administration of Federal Reserve credit, reserves, and risk-
management policies for a given institution. All collateral must be 
acceptable to the administrative Reserve Bank. The Reserve Bank may, 
at its discretion, accept securities in transit on the Fedwire 
Securities Service as collateral to support the maximum daylight 
overdraft capacity level. Collateral eligibility and margins are the 
same for PSR policy purposes as for the discount window. See http://www.frbdiscountwindow.org/ for information.
    \75\ Collateralized capacity, on any given day, equals the 
amount of collateral pledged to the Reserve Bank, not to exceed the 
difference between the institution's maximum daylight overdraft 
capacity level and its net debit cap in the given reserve 
maintenance period.
    \76\ See n. 61, supra.
    \77\ See n. 62, supra.
2. General Procedure for Requesting Collateralized Capacity
    If an institution is requesting collateralized capacity for the 
first time, it must submit a resolution from its board of directors 
indicating its board's approval of the requested max cap. Increases to 
collateralized capacity previously approved by Reserve Banks will also 
require a board of directors resolution. In most cases, an institution 
will not have to provide to a Reserve Bank a business case justifying 
its request for collateralized capacity. However, an institution must 
provide a business-case justification if:
     The institution requests a max cap in excess of its 
capital measure multiplied by 2.25; or
     The administrative Reserve Bank exercises discretion to 
require that the institution submit a business-case justification due 
to recent developments in the institution's condition.
    Once a Reserve Bank has approved an institution's collateralized 
capacity, the collateralized capacity will remain in place, without the 
need for further action by the institution, provided that the 
institution maintains the eligibility standards outlined above.
3. Streamlined Procedure for Certain FBOs
    An FBO that is highly capitalized \78\ and has a self-assessed net 
debit cap may request from its Reserve Bank a streamlined procedure to 
obtain a maximum daylight overdraft capacity. These FBOs are not 
required to provide documentation of the business case or obtain a 
board of directors resolution for collateralized capacity in an amount 
that exceeds its current net debit cap (which is based on 10 percent 
worldwide capital times its cap multiple), as long as the requested 
total capacity is 100 percent or less of worldwide capital times a 
self-assessed cap multiple.\79\ In order to ensure that intraday 
liquidity risk is managed appropriately and that the FBO will be able 
to repay daylight overdrafts, eligible FBOs under the streamlined 
procedure will be subject to an initial and periodic review of 
liquidity plans that are analogous to the liquidity reviews undergone 
by U.S. institutions.\80\ If an eligible FBO requests capacity in 
excess of 100 percent of worldwide capital times the self-assessed cap 
multiple, it would be subject to the general procedure.

----------
    \78\ See n. 62, supra.
    \79\ For example, an FBO that is highly capitalized is eligible 
for uncollateralized capacity of 10 percent of worldwide capital 
times the cap multiple. The streamlined collateralized capacity 
procedure would provide such an institution with additional 
collateralized capacity of 90 percent of worldwide capital times the 
cap multiple. As noted above, FBOs report their worldwide capital on 
the Annual Daylight Overdraft Capital Report for U.S. Branches and 
Agencies of Foreign Banks (FR 2225).
    \80\ The liquidity reviews will be conducted by the 
administrative Reserve Bank, in consultation with each FBO's home 
country supervisor.

* * * * *

Revisions to Section II.F of the PSR Policy

    The Board proposes to revise section II.F, paragraphs 3 and 4 of 
the ``Federal Reserve Policy on Payment System Risk'' as follows:

F. Special Situations

    Certain institutions are subject to a daylight-overdraft penalty 
fee levied against the average daily daylight

[[Page 29787]]

overdraft incurred by the institution. These include Edge and agreement 
corporations, bankers' banks that are not subject to reserve 
requirements, and limited-purpose trust companies. The annual rate used 
to determine the daylight-overdraft penalty fee is equal to the annual 
rate applicable to the daylight overdrafts of other institutions (50 
basis points) plus 100 basis points. The effective daily overdraft 
penalty rate equals the annual penalty rate divided by 360.\81\ The 
daylight-overdraft penalty rate applies to the institution's daily 
average daylight overdraft in its Federal Reserve account. The 
daylight-overdraft penalty fee for these institutions is charged in 
lieu of, not in addition to, the daylight overdraft fee that applies to 
other institutions.

----------
    \81\ The effective daily daylight-overdraft penalty rate is 
truncated to 0.0000416.

* * * * *
    Add Part III. Policy on Overnight Overdrafts as follows:

Part III. Policy on Overnight Overdrafts

    An overnight overdraft is a negative balance in a Federal Reserve 
account at the close of the business day. The Board expects 
institutions to avoid overnight overdrafts.
    To minimize the Reserve Banks' exposure to overnight overdrafts, 
which are not always collateralized, the Board authorizes Reserve Banks 
to discourage depository institutions from incurring overnight 
overdrafts by charging a penalty fee. Institutions that do not 
extinguish their daylight overdrafts and incur overnight overdrafts are 
subject to ex post counseling in addition to a penalty fee.
    The Board establishes the following penalty rate structure for 
overnight overdrafts:
    1. An overnight overdraft penalty rate of the primary credit rate 
plus 4 percentage points (annual rate).
    2. A minimum penalty fee of 100 dollars, regardless of the amount 
of the overnight overdraft. The minimum fee is administered per each 
occasion.
    3. A charge for each calendar day (including weekends and holidays) 
that an overnight overdraft is outstanding.

----------
    \92\ See n. 33, which defines the term ``business day'' for this 
purpose.

* * * * *

    By order of the Board of Governors of the Federal Reserve 
System.
Ann Misback,
Secretary of the Board.
[FR Doc. 2021-11649 Filed 6-2-21; 8:45 am]
BILLING CODE P