[Federal Register Volume 87, Number 235 (Thursday, December 8, 2022)]
[Notices]
[Pages 75254-75267]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-26615]


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FEDERAL RESERVE SYSTEM

[Docket No. OP-1749]


Improvements to the Federal Reserve Policy on Payment System Risk 
To Increase Access to Intraday Credit, Support the FedNow Service, and 
Simplify the Federal Reserve Policy on Overnight Overdrafts

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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SUMMARY: The Board of Governors of the Federal Reserve System (Board) 
is adopting changes to part II of the Federal Reserve Policy on Payment 
System Risk (PSR policy) substantially as proposed. The changes expand 
the eligibility of depository institutions to request collateralized 
intraday credit from the Federal Reserve Banks (Reserve Banks) while 
reducing administrative steps for requesting collateralized intraday 
credit. In addition, the Board is adopting changes to the PSR policy 
that clarify the eligibility standards for accessing uncollateralized 
intraday credit from Reserve Banks and modify the impact of a holding 
company's or affiliate's supervisory rating on an institution's 
eligibility to request uncollateralized intraday credit capacity. The 
Board is also adopting changes to part II of the PSR policy to support 
the deployment of the FedNow\SM\ Service (FedNow Service). Finally, the 
Board is simplifying the Federal Reserve Policy on Overnight Overdrafts 
(Overnight Overdrafts policy) and incorporating into the PSR policy as 
part III.

DATES: The FedNow Service-related changes to the PSR policy and the 
changes related to the Overnight Overdrafts policy will become 
effective when Reserve Banks begin processing live transactions for 
FedNow Service participants (expected in 2023). The exact date will be 
announced on the Board's website. The remaining changes to part II of 
the PSR policy will become effective February 6, 2023.

FOR FURTHER INFORMATION CONTACT: Jason Hinkle, Deputy Associate 
Director (202-912-7805), Michelle Olivier, Lead Financial Institution 
Policy Analyst (202-452-2404), Brajan Kola, Senior Financial 
Institution Policy Analyst (202-736-5683); or Cody Gaffney, Attorney 
(202-452-2674), 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. Current Framework for Intraday Credit in the PSR Policy

    To ensure the smooth functioning of payment and settlement systems, 
the Reserve Banks provide intraday credit (also known as daylight 
overdrafts) to depository institutions (institutions) with accounts at 
the Reserve Banks. Part II of the PSR policy outlines the methods that 
Reserve Banks use to control credit risk associated with providing 
intraday credit.\1\
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    \1\ See https://www.federalreserve.gov/paymentsystems/psr_about.htm. To assist institutions in implementing part II of the 
PSR policy, the Federal Reserve has prepared two guidance 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. Both the Overview and the 
Guide are available at https://www.federalreserve.gov/paymentsystems/psr_relpolicies.htm. Separately, part I of the PSR 
policy sets out the Board's views and related standards, regarding 
the management of risks in financial market infrastructures, 
including those operated by the Reserve Banks.
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    To be eligible for intraday credit, the PSR policy requires that an 
institution be financially healthy and be eligible for regular access 
to the discount window.\2\ In general, the dollar amount of daylight 
overdrafts that an eligible institution may incur in its Federal 
Reserve account on an uncollateralized basis is known as its ``net 
debit cap.'' An institution's net debit cap is computed by multiplying 
the appropriate capital measure by a ``cap multiple.'' \3\ The cap 
multiple is determined by reference to the institution's ``cap 
category,'' which is based on (i) the supervisory ratings of the 
institution and any parent or affiliates, and (ii) the institution's 
Prompt Corrective Action (PCA) designation (for domestic institutions) 
or FBO PSR capital category (for U.S. branches and agencies of foreign 
banking organizations (FBOs)).\4\ Reserve Banks generally use an ex 
post system to monitor whether an institution's daylight overdrafts 
exceed its net debit cap.\5\ In addition, certain institutions may 
pledge collateral to their Reserve Banks under the ``max cap'' program 
to secure daylight overdraft capacity in excess of their net debit 
caps, subject to Reserve Bank approval.\6\
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    \2\ See section II.D.1 of the PSR policy. The PSR policy does 
not expressly define the term ``financially healthy.''
    \3\ Id. An institution's capital measure is a number derived 
from the size of its capital base.
    \4\ 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.'' Institutions whose 
parents or affiliates are assigned a low supervisory rating are 
ineligible for a net debit cap. See section VII.A of the Guide.
    \5\ See section II.G.1 of the PSR policy. The Reserve Banks also 
monitor some institutions' accounts in real time. Real-time 
monitoring allows a Reserve Bank to prevent an institution from 
transferring funds from an account that lacks sufficient funds or 
overdraft capacity to cover the payment. See id. section II.G.2 of 
the PSR policy.
    \6\ See section II.E of the PSR policy. An institution's net 
debit cap plus its collateralized capacity is referred to as its 
``maximum daylight overdraft capacity'' or ``max cap.'' Id. 
Collateral eligibility and margins are the same for intraday credit 
purposes as for the discount window. See http://www.frbdiscountwindow.org/ for information on the discount window 
and intraday credit collateral acceptance policy and collateral 
margins.
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    In 2008, the Board approved changes to part II of the PSR policy to 
encourage

[[Page 75255]]

greater collateralization of daylight overdrafts, recognizing that 
collateral reduces credit risk to Reserve Banks.\7\ Specifically, the 
Board 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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    \7\ See 73 FR 79109 (Dec. 24, 2008). These changes were not 
fully implemented until 2011.
    \8\ See section II.C of the PSR policy.
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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 available for all 
institutions with a positive net debit cap. Specifically, institutions 
in the ``exempt-from-filing'' or ``de minimis'' 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, cannot request 
collateralized capacity under the max cap program.\9\
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    \9\ See section II.E.1 of the PSR policy.
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    Further, obtaining collateralized capacity under the max cap 
program requires institutions to undertake certain administrative steps 
and analysis. 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.\10\ Second, and as stated 
previously, the max cap program is limited to institutions that have 
already adopted a self-assessed net debit cap, which in turn 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.\11\
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    \10\ See id. Section II.E.2 of the PSR policy allows U.S. 
branches or agencies of 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.
    \11\ See section II.D.a of the PSR policy and supra note 4 which 
discuss cap categories. The ``high,'' ``above average,'' and 
``average'' cap categories require a self-assessment.
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B. The Overnight Overdrafts Policy

    Intraday overdrafts occur when an institution has a negative 
balance in its Federal Reserve account during the Fedwire[supreg] Funds 
Service business day. Overnight overdrafts occur when an institution 
has a negative account balance at the end of the Fedwire Funds Service 
business 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.\12\ If an institution 
has a negative balance at the end of the business day, the Reserve 
Banks apply an overnight overdraft penalty for a 24-hour period. 
Currently, the penalty fee includes a multiday charge for overnight 
overdrafts on calendar days occurring over weekends and holidays. The 
Overnight Overdrafts policy contains a fee-escalation feature, whereby 
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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    \12\ See 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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C. The FedNow Service and the PSR Policy

    In 2019, the Board approved the FedNow Service, a new interbank 
24x7x365 real-time gross settlement service with clearing functionality 
to support end-to-end instant payments in the United States.\13\ The 
FedNow Service will settle funds transfers between institutions through 
debit and credit entries to balances in master accounts held at the 
Reserve Banks. The new service will promote ubiquitous, safe, and 
efficient instant payments in the United States.
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    \13\ See 84 FR 39297 (Aug. 9, 2019). Current information on the 
FedNow Service can be found at https://www.frbservices.org/financial-services/fednow.
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    Intraday credit from the Reserve Banks is currently available 
during the 22-hour business day that is based on the Fedwire Funds 
Service.\14\ As described in the Board's 2020 notice on FedNow Service 
details, the FedNow Service will have a 24-hour business day, each day 
of the week, including weekends and holidays.\15\ Access to intraday 
credit will be available on a 24x7x365 basis to FedNow Service 
participants under the same terms and conditions as are available for 
other Federal Reserve services.
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    \14\ See FRBservices.org, Wholesale Services Operating Hours and 
FedPayments[supreg] Manager Hours of Availability--Fedwire Funds 
Service Schedule, https://www.frbservices.org/resources/financial-services/wires/operating-hours.html.
    \15\ 85 FR 48522, 48524 (Aug. 11, 2020).
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    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. Under this 
framework, an end-of-day balance will be calculated for each calendar 
day, with transactions occurring on weekends and holidays recorded and 
reported in the same way as transactions occurring on business 
days.\17\ End-of-day balances will be reported on Federal Reserve 
accounting records for all depository institutions using payment 
services on each calendar day.
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    \16\ Id. 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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II. Proposed Changes and Board Response to Public Comments

    On June 3, 2021, the Board published a notice in the Federal 
Register that requested comment on proposed changes that would (i) 
expand eligibility of institutions to request collateralized intraday 
credit from the Reserve Banks under the max cap program and reduce 
administrative steps associated with requesting collateralized capacity 
in the PSR policy; (ii) clarify the eligibility standards for accessing 
uncollateralized intraday credit from Reserve Banks; (iii) align the 
PSR policy with the deployment of the FedNow Service; and (iv) simplify 
and incorporate the Overnight Overdrafts policy as part III of the PSR 
policy.\18\
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    \18\ 86 FR 29776 (Jun. 3, 2021).
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    The proposal's comment period ended on August 2, 2021. The Board 
received thirteen comment letters from six trade organizations, two 
institutions, two payment services operators, one academic, one think 
tank, and one consulting firm. The remainder of this section describes 
in further detail each aspect of the proposal, summarizes and

[[Page 75256]]

responds to public comments, and outlines the changes to the PSR policy 
that the Board is adopting.
    For the reasons set forth below, the Board will adopt the proposed 
changes substantially as proposed. The FedNow Service-related changes 
to the PSR policy and the changes related to the Overnight Overdrafts 
policy will become effective when Reserve Banks begin processing live 
transactions for FedNow Service participants (expected in 2023). The 
exact date will be announced on the Board's website. The remaining 
changes to part II of the PSR policy will become effective February 6, 
2023.

A. Access to Collateralized Capacity

1. Proposed Changes
    The Board proposed to modify the PSR policy to expand access to and 
reduce the administrative steps associated with requesting 
collateralized capacity. The Board explained in the request for comment 
that extending intraday credit to institutions on a collateralized 
basis generally poses less risk to the Reserve Banks and the payment 
system than extending intraday credit on an uncollateralized basis. As 
a result, expanding access to collateralized intraday credit could 
improve the effectiveness of Reserve Bank intraday credit as a 
liquidity tool without materially increasing credit risk to the Reserve 
Banks.
    Specifically, the Board proposed to amend the PSR policy so that 
institutions, subject to Reserve Bank review and discretion, would be 
eligible to request collateralized capacity under the max cap program 
even if they have not first obtained a self-assessed net debit cap. 
Under the proposal, institutions with a cap category of ``zero,'' 
``exempt-from-filing,'' or ``de minimis'' would be eligible to request 
collateralized capacity from their Reserve Banks.\19\ A domestic 
institution with such a cap category would be eligible to request 
collateralized capacity if the institution's PCA designation is 
``undercapitalized'' or better.\20\ Similarly, a U.S. branch or agency 
of an FBO with such a cap category would be eligible to request 
collateralized capacity if its FBO PSR capital category is 
``undercapitalized'' or better.\21\
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    \19\ Institutions with one of the self-assessed net debit caps 
are currently eligible to request collateralized capacity.
    \20\ See 12 U.S.C. 1831o.
    \21\ See section II.D.2 and n. 63 of the PSR policy for a 
discussion of FBO PSR capital categories. Generally, an FBO's PSR 
capital category is based on the same capital and leverage ratios 
that determine a domestic institution's PCA designation.
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    The Board explained that, given the important role collateral plays 
in reducing credit risk to Reserve Banks, the eligibility criteria for 
requesting collateralized capacity should be less restrictive than the 
criteria for accessing uncollateralized capacity. As a result, under 
the proposal, some institutions that are not eligible to establish a 
positive net debit cap would be eligible to request collateralized 
capacity.\22\
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    \22\ As the Board noted in the request for comment, an 
institution would need to remain financially healthy and be eligible 
for regular access to the discount window to qualify for 
collateralized or uncollateralized capacity.
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    The Board also proposed to simplify the administrative steps 
associated with requesting and maintaining collateralized capacity 
under the max cap program. Specifically, the Board proposed to 
eliminate, in most circumstances, the requirement that an institution 
provide a written business case when requesting collateralized 
capacity. The Board also proposed to eliminate the requirement that an 
institution's board of directors submit an annual resolution approving 
its collateralized capacity.\23\
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    \23\ The Board did not propose to amend the current streamlined 
max cap process available to certain FBOs. See supra note 10.
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2. Public Comments and Board Response
Public Comments
    Five commenters (two institutions, two trade organizations, and one 
payment services operator) supported the proposed changes related to 
collateralized capacity. One of these commenters, an institution, 
argued that the proposed changes would assist with liquidity planning 
and risk management. Another commenter, a trade organization, expressed 
support for these proposed changes and noted that expanding access to 
collateralized capacity would be helpful since community banks may need 
collateralized capacity in a 24x7x365 environment and as transaction 
levels increase. The commenter noted that historically, small 
institutions and community banks have not requested collateralized 
capacity.
    Two commenters opposed the proposed changes related to 
collateralized capacity. One such commenter, a think tank, asserted 
that the changes would increase credit risk to Reserve Banks and would 
have a negative effect on the payment system. This commenter argued 
that an institution's supervisory ratings should remain a factor in 
determining the institution's eligibility to request collateralized 
capacity, suggesting that the proposal would lead to the most ``credit-
questionable or badly run'' institutions obtaining collateralized 
capacity. The commenter also opposed the proposal to allow an 
institution to obtain collateralized capacity without obtaining a self-
assessed net debit cap, submitting a business case, or providing an 
annual board of directors resolution. The commenter argued that these 
requirements provide important information to the Reserve Banks and 
require an institution's board and senior management to exercise 
oversight over the institution's participation in the payment system. 
The other commenter that opposed the proposed changes related to 
collateralized capacity, a consulting firm, expressed concern that the 
changes could exacerbate the already high demand for collateral 
accepted by Reserve Banks, particularly during periods of stress in the 
financial system, further increasing market volatility.
    Two commenters did not oppose the proposed changes but requested 
clarifications or made recommendations related to collateralized 
capacity. One such commenter, an institution, recommended that the 
Board clarify the relationship between the collateral pledged to the 
discount window and collateral pledged to the Reserve Bank for intraday 
credit purposes. collateralized intraday credit capacity. Another 
commenter, also an institution, recommended that the Board simplify the 
max cap program by eliminating the existing streamlined max cap 
procedure used by highly capitalized FBOs.\24\ The commenter noted that 
eliminating the streamlined max cap would help simplify the PSR policy.
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    \24\ See supra note 10.
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Board Response
    For the reasons described below, the Board is adopting the changes 
related to collateralized credit as proposed, with some clarifications 
in response to the public comments.
    Collateralized intraday credit poses less risk to Reserve Banks 
than uncollateralized intraday credit. The Board therefore believes 
that the criteria for requesting collateralized capacity should be more 
accommodative than the criteria for requesting uncollateralized 
capacity, and that an institution that is at least ``undercapitalized'' 
and eligible for regular access to the discount window should be 
eligible to request collateralized capacity from its Reserve Bank. At 
the same time, access to intraday credit capacity, both collateralized 
and uncollateralized, will remain at the discretion of the Reserve

[[Page 75257]]

Banks. Weak or poorly run institutions will not automatically obtain 
collateralized capacity as one commenter theorized. The Reserve Banks 
will continue to review, on an ongoing basis, the condition of all 
institutions with access to intraday credit capacity, both 
collateralized and uncollateralized, in order to identify potential 
risks to the Reserve Banks and the payment system. If a Reserve Bank 
assesses that an institution poses excessive risk, it can reduce or 
remove the institution's intraday credit capacity and implement other 
risk mitigants.
    Similarly, the Board does not believe that simplifying the 
administrative steps associated with requesting and maintaining 
collateralized capacity will increase risks to the Reserve Banks. The 
Reserve Banks have the discretion to request additional information 
when evaluating a request for collateralized capacity. In addition, the 
Reserve Banks will retain access to various sources of information 
outside of the self-assessment process--including supervisory 
information--to help evaluate the risks posed by institutions 
requesting collateralized capacity. The institution's board of 
directors will still be required to approve both the initial request 
for collateralized capacity and subsequent requests to increase the 
previously approved collateralized capacity.\25\
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    \25\ Consistent with section II.D of the Guide, the Board will 
also continue to expect institutions' boards of directors to 
prudently manage risks associated with their Federal Reserve 
accounts.
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    Further, contrary to the comment from the consulting firm, the 
Board does not believe that expanding access to collateralized capacity 
is likely to lead to a shortage of collateral accepted by Reserve Banks 
for intraday credit or other purposes, even during periods of financial 
stress. The Reserve Banks accept a wide range of securities and loans 
as collateral for intraday credit and discount window purposes.\26\ 
Additionally, while the changes adopted in this notice will expand 
access to collateralized intraday credit, the vast majority of 
institutions--approximately 4,700 out of 5,000 institutions currently 
with a master account--will continue to remain eligible for 
uncollateralized intraday credit and will not be required to pledge 
collateral in order to obtain intraday credit.
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    \26\ Generally, collateral eligibility and margins are the same 
for intraday credit purposes as for the discount window. See 
FRBdiscountwindow.org, Collateral Information, https://www.frbdiscountwindow.org/pages/collateral/collateral_eligibility.
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    With respect to the relationship between collateralized intraday 
credit capacity and collateral pledged to the discount window, the 
Federal Reserve's collateral guidelines contain a detailed list of 
margins and acceptability criteria for securities and loans that can be 
pledged to Reserve Banks for both discount window and intraday credit 
purposes.\27\ When an institution pledges collateral to its Reserve 
Bank for daylight overdraft or discount window purposes, the collateral 
is placed in a single Federal Reserve collateral account. Collateral 
securing an extension of credit from the discount window may not be 
simultaneously applied for daylight overdraft purposes. When an 
institution repays an outstanding discount window loan, the 
institution's collateral available for daylight overdraft purposes is 
increased by the value of the collateral that had been encumbered by 
the discount window loan.
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    \27\ See id.
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    With respect to the streamlined max cap procedure for FBOs, the 
Board did not propose to eliminate these streamlined procedures. FBOs 
with an FBO PSR capital category of ``highly capitalized'' and a self-
assessed net debit cap may use the streamlined procedure to obtain a 
max cap. These FBOs are not required to provide documentation of the 
business need or a board of directors resolution for collateralized 
capacity as long as the FBO remains highly capitalized and the 
requested total capacity is 100 percent or less of worldwide capital 
times the self-assessed cap multiple. Prior to modifying this aspect of 
the PSR policy, the Board believes that additional feedback from the 
public would be necessary in order to evaluate the impact on FBOs of 
changes to the streamlined max cap process. For these reasons, the 
Board is not adopting changes to the streamlined max cap process.

B. Clarifying Access to Uncollateralized Capacity

1. Proposed Changes
    The Board proposed to amend the PSR policy to clarify when an 
institution is eligible for uncollateralized intraday credit capacity.
    Specifically, the Board proposed to clarify 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 (i) PCA designation or FBO PSR capital category, as 
applicable, and (ii) most recent supervisory ratings. The Board 
proposed to incorporate into the PSR policy the following table--which 
is based on an existing table in the Guide to the PSR policy--to 
clarify when institutions can request a positive net debit cap from a 
Reserve Bank.
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    \28\ The current table in the Guide, as well as the table in the 
request for comment, refers to a ``Domestic capital category'' 
rather than ``PCA designation.'' To provide additional clarity, the 
Board is making a technical change to replace ``Domestic capital 
category'' with ``PCA designation.''

                          Eligibility Criteria for Requesting a Positive Net Debit Cap
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                                                                Supervisory rating
  PCA designation \28\ 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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[[Page 75258]]

    The Board also proposed to modify the PSR policy so that low 
supervisory ratings of a parent or affiliate would not, in certain 
cases, result in an institution losing its positive net debit cap. 
Under the proposal, if an institution's holding company or affiliate is 
assigned a low supervisory rating, the institution would be eligible to 
request the ``exempt-from-filing,'' ``de minimis,'' or ``average'' cap 
categories, but not the ``above average'' or ``high'' cap 
categories.\29\ Additionally, the Board proposed that a Reserve Bank 
would assign an institution a ``zero'' net debit cap if supervisory 
information about the holding company or affiliated institutions 
reveals material operating or financial weaknesses that pose 
significant risks to the institution.
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    \29\ For this purpose, a low supervisory rating for a holding 
company would include a Deficient-2 rating in any of the components 
of the 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 explained that the proposed changes would provide greater 
certainty to institutions and would allow the Reserve Banks to tailor 
intraday credit access in response to supervisory developments.
2. Public Comments and Board Response
Public Comments
    Six commenters (two institutions, a payment services operator, and 
three trade organizations) expressed support for the proposed changes 
aimed at clarifying access to uncollateralized capacity. The commenters 
stated that incorporating language from the Guide directly into the PSR 
policy would help simplify and clarify the eligibility criteria for 
requesting uncollateralized capacity from their Reserve Banks. The 
commenters also supported the proposed change that would allow an 
institution to maintain access to some uncollateralized capacity, up to 
and including the ``average'' cap category, despite the low supervisory 
ratings of a parent or affiliate. The commenters noted that providing a 
path to some uncollateralized capacity for these institutions is a 
welcome change that is likely to improve institutions' abilities to 
manage short-term liquidity shortfalls. Three of these six commenters, 
two trade organizations and an institution, urged the Board to ensure 
that the proposed changes do not increase the regulatory oversight or 
examination of institutions requesting uncollateralized capacity.
    The Board did not receive any comments opposed to these aspects of 
the proposal.
Board Response
    The Board is adopting the changes related to uncollateralized 
intraday credit substantially as proposed.\30\ The Board is clarifying 
that Reserve Bank staff will continue to review supervisory information 
about institutions, parents, and affiliates for purposes of determining 
eligibility for uncollateralized capacity, but the changes related to 
uncollateralized intraday credit are not intended to increase 
regulatory or supervisory expectations.
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    \30\ As noted above, the Board is making a technical change to 
replace ``Domestic capital category'' with ``PCA designation'' in 
the Eligibility Criteria for Requesting a Positive Net Debit Cap 
table. See supra note 28.
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C. Changes To Support the Deployment of the FedNow Service

1. Proposed Changes
    The Board proposed changes to the PSR policy to align the policy 
with the deployment of the FedNow Service. In particular, the Board 
proposed 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.\31\ 
Currently, the PSR policy is based on the 22-hour business day of the 
Fedwire Funds Service.
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    \31\ The Board also proposed adding a new posting rule to 
account for FedNow Service transactions and modified an existing 
posting rule to ensure that all credits and debits to an 
institution's master account post at the close of the business day 
before the next business day begins.
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    Consistent with past changes to operating hours, the Board also 
proposed to revise the daylight overdraft fee calculations under 
section II.C of the PSR policy and the penalty fee calculations under 
section II.F of the PSR policy to reflect the 24-hour business day. 
Currently, daylight overdraft fees for uncollateralized overdrafts 
(also referred to as the daily daylight overdraft charge) are computed 
by multiplying two components: (a) the institution's average daily 
uncollateralized daylight overdraft (which is calculated by dividing 
the sum of uncollateralized daylight overdrafts at the end of each 
minute of the scheduled operating day of the Fedwire Funds Service by 
the total number of minutes in the operating day); and (b) the 
effective daily rate (50 basis points annual rate, multiplied by the 
fraction of a 24-hour day during which the Fedwire Funds Service is 
scheduled to operate, divided by 360 days).\32\ The lengthening of the 
business day from 22 to 24 hours would impact both components of the 
daily daylight overdraft charge calculation in opposite directions. In 
the request for comment, the Board incorrectly stated that the daily 
daylight overdraft charge would increase slightly (by less than 0.4 
percent) as a result of the proposed changes. As explained below, the 
corrected calculations show that daily daylight overdraft charges would 
slightly decrease (by approximately 0.3 percent) under the proposal. 
The cause of the discrepancy is a calculation error.\33\
---------------------------------------------------------------------------

    \32\ See section II.C of the PSR policy. See also Overview at p. 
21-22. Institutions' daily daylight overdraft charges are summed 
across a 10-business-day 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. See id.
    \33\ In the request for comment, the impact analysis for the 
proposed effective daily fee rate was erroneously rounded instead of 
truncated to the seventh decimal. Since 2004, the effective daily 
rates for both the regular daylight overdraft fee and the penalty 
fee have been truncated at seven decimal places due to requirements 
for Federal Reserve IT systems. See 69 FR 57917, 57923 (Sep. 28, 
2004).
---------------------------------------------------------------------------

    Certain institutions are charged a daylight-overdraft penalty fee 
in lieu of the daily daylight overdraft charge.\34\ Currently, the 
daylight-overdraft penalty fee is computed by multiplying (a) the 
institution's average daily uncollateralized daylight overdraft 
(calculated as described above) by (b) the daylight-overdraft penalty 
rate (150 basis points multiplied by the fraction of the 24-hour day 
during which the Fedwire Funds Service operates, divided by 360 
days).\35\ The lengthening of the business day from 22 to 24 hours 
would impact both components of the daylight-overdraft penalty fee 
calculation in opposite directions. As explained below, under the 
proposal, the daylight-overdraft penalty fee would decrease by 
approximately 0.1 percent with the move from a 22-hour business day to 
a 24-hour business day.
---------------------------------------------------------------------------

    \34\ These are institutions that do not have regular access to 
the discount window and, therefore, are expected not to incur 
daylight overdrafts in their Federal Reserve accounts. Penalty fee 
payers are Edge Act and agreement corporations, bankers' banks that 
have not waived their exemption from reserve requirements, limited-
purpose trust companies, and government-sponsored enterprises and 
international organizations. See section II.C of the PSR policy.
    \35\ See section II.F of the PSR policy.

---------------------------------------------------------------------------

[[Page 75259]]

2. Public Comments and Board Response
Public Comments
    Two commenters, one institution and one trade organization, 
supported the shift to the 24-hour business day. Eight commenters (one 
institution, one payment services operator, one payment standards 
organization, and five trade organizations) opposed the proposed 
changes aimed at aligning the PSR policy with the launch of the FedNow 
Service. Specifically, the commenters opposed the proposed changes to 
the extent the proposed changes would lead to an increase in daylight 
overdraft fees and penalty fees for institutions that do not opt to 
participate in the FedNow Service.
Board Response
    The Board acknowledges commenters' concerns regarding higher 
daylight overdraft and penalty fees. In response to these comments, the 
Board conducted additional analysis, and determined that both daylight 
overdraft and penalty fees would slightly decrease under the proposal, 
rather than slightly increase (as the proposal incorrectly stated). The 
Board reached out to the eight commenters that opposed the proposed fee 
changes to clarify the impact of the proposed changes. Three of these 
commenters (two trade organizations and one payment services operator) 
accepted the Board's invitation to discuss the proposed fee changes, 
and all of these commenters indicated that the concerns expressed in 
their respective comment letters regarding the proposed fee changes 
have been fully addressed.
    As shown in the formula below, an institution's daily daylight 
overdraft charge is calculated by multiplying the average daily 
uncollateralized daylight overdraft by the truncated effective daily 
rate. As result of the shift from a 22-hour to a 24-hour business day, 
the two components of the daily daylight overdraft charge calculation 
are impacted in opposite directions. For an institution that incurs the 
same amount of end-of-minute overdrafts, the average daily 
uncollateralized daylight overdraft slightly decreases, while the 
effective daily rate slightly increases.\36\
---------------------------------------------------------------------------

    \36\ As noted in Example 1 below, the effective daily rate 
increases from 0.000127 to 0.000138.
---------------------------------------------------------------------------

Calculation of the Daily Daylight Overdraft Charge
[GRAPHIC] [TIFF OMITTED] TN08DE22.002

    In the request for comment, the Board incorrectly stated that that 
the daily daylight overdraft charge would slightly increase. As shown 
in Example 1 below, the daily daylight overdraft charge will slightly 
decrease by approximately 0.3 percent before the application of fee 
waivers. This decrease results from the fact that the decrease in the 
average daily overdraft component more than offsets the increase in the 
effective daily rate component.
    Similarly, and as shown in the formula below, an institution's 
daily daylight-overdraft penalty fee is calculated by multiplying the 
average daily collateralized and uncollateralized daylight overdraft by 
the truncated effective daily rate. As a result of the shift from 22-
hours to a 24-hour business day, the two components of the daily 
daylight-overdraft penalty fee calculation are impacted in opposite 
directions. For an institution that incurs the same amount of end-of-
minute overdrafts, the average daily collateralized and 
uncollateralized overdrafts slightly decrease, while the effective 
daily rate slightly increases.\37\
---------------------------------------------------------------------------

    \37\ As described in Example 2 below, the effective daily rate 
increases from 0.0000382 to 0.0000416. The proposal incorrectly 
stated that the penalty rate under the 22-hour environment is 
0.0000381 instead of 0.0000382.
---------------------------------------------------------------------------

Calculation of Daily Daylight-Overdraft Penalty Fee
[GRAPHIC] [TIFF OMITTED] TN08DE22.003

    As shown in Example 2 below, the gross daily penalty fee will 
decrease by approximately 0.1%. This decrease results from the fact 
that the decrease in the average daily collateralized and 
uncollateralized overdrafts component more than offsets the increase in 
the effective daily rate component.

               Example 1--Daily Daylight Overdraft Charge
                   [22-Hour vs. 24-hour business day]
------------------------------------------------------------------------
          22-Hour business day                 24-Hour business day
------------------------------------------------------------------------
 Annual rate charged on uncollateralized daylight overdrafts =
 50 basis points.
 Example: sum of end-of-minute uncollateralized overdrafts for
 one day = $4 billion.
------------------------------------------------------------------------
Parameters:                              Parameters:
     Standard Fedwire Funds          Business day based
     Service business day = 22 hours         on the FedNow Service
     (1,320 + 1 minute for transactions      operating hours = 24 hours
     posting after the close of Fedwire      (1,440 minutes, all
     Funds at 7:00:59 p.m.).                 transactions posting at
                                             7:00:59 p.m.).
Daily daylight overdraft charge          Daily charge calculation:
 calculation:

[[Page 75260]]

 
     Average uncollateralized        Average
     overdraft = $4,000,000,000/1,321        uncollateralized overdraft
     minutes = $3,028,009.08.                = $4,000,000,000/1,440
                                             minutes = $2,777,777.78.
     Effective daily rate            Effective daily
     (truncated) = .0050 x (22/24            rate (truncated) = .0050 x
     hours) x (1/360 days) = 0.0000127.      (24/24 hours) x (1/360
                                             days) = 0.0000138.
     Gross daily overdraft           Gross daily
     charge (rounded) = $3,028,009.08 x      overdraft charge (rounded)
     0.0000127 = $38.46.                     = $2,777,777.78 x 0.0000138
                                             = $38.33.
------------------------------------------------------------------------
Percent change: ($38.33-$38.46)/$38.46 = -0.34%.
------------------------------------------------------------------------


            Example 2--Daily Daylight-Overdraft Penalty Fees
                   [22-Hour vs. 24-hour business day]
------------------------------------------------------------------------
          22-Hour business day                 24-Hour business day
------------------------------------------------------------------------
 Annual penalty rate charged on uncollateralized and
 collateralized daylight overdrafts = 150 basis points.
 Example: sum of end-of-minute collateralized and
 uncollateralized overdrafts for one day = $4 billion.
------------------------------------------------------------------------
Parameters:                              Parameters:
     Standard Fedwire Funds          Business day based
     Service business day = 22 hours         on the FedNow Service
     (1,320 + 1 minute for transactions      operating hours = 24 hours
     posting after the close of Fedwire      (1,440 minutes, all
     Funds at 7:00:59 p.m.).                 transactions posting at
                                             7:00:59 p.m.).
Daily daylight-overdraft penalty fee     Daily daylight-overdraft
 calculation:                             penalty fee calculation:
     Average total overdraft =       Average total
     $4,000,000,000/1321 minutes =           overdraft = $4,000,000,000/
     $3,028,009.08.                          1,440 minutes =
                                             $2,777,777.78.
     Effective daily rate            Effective daily
     (truncated) = .0150 x (22/24            rate (truncated) = .0150 x
     hours) x (1/360 days) = 0.0000382.      (24/24 hours) x (1/360
                                             days) = 0.0000416.
     Daily gross penalty fee         Daily gross penalty
     (rounded) = $3,028,009.08 x             fee (rounded) =
     0.0000382 = $115.67.                    $2,777,777.78 x 0.0000416 =
                                             $115.56.
------------------------------------------------------------------------
Percent change: ($115.56-$115.67)/$115.67 = -0.095%.
------------------------------------------------------------------------

    Ultimately, the proposal would slightly lower fees for all 
institutions. In addition, because the effective daily rate and the 
daylight-overdraft penalty rate would be based on a 24-hour business 
day for all institutions, whether or not they participate in the FedNow 
Service, the proposal would ensure equitable treatment across all 
institutions. All institutions will be assessed the same fee for 
overdrafts of the same duration and size, regardless of participation 
in a particular service. For these reasons, the Board is adopting the 
proposed changes with the corrections discussed above.

D. Proposed Changes to the Overnight Overdrafts Policy

1. Proposed Changes
    The Board proposed to incorporate the Overnight Overdrafts policy 
as part III of the PSR policy. Under the proposal, an institution would 
incur an overnight overdraft on each calendar day that its account 
balance is negative at 7:00:59 p.m. ET, which is the newly proposed 
close of the business day.
    In addition, the Board proposed to eliminate the automatic multiday 
charge for overnight overdrafts during weekends or holidays. Under the 
proposal, all institutions, regardless of the Reserve Bank payment 
services that they use, will incur an overnight overdraft penalty 
charge for each calendar day, including weekends and holidays, that an 
overnight overdraft is outstanding.
    Finally, the 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 Board proposed to eliminate the overnight overdraft 
fee-escalation feature for all institutions. The Board explained that 
the fee-escalation feature adds unnecessary complexity to the Overnight 
Overdrafts policy and does not meaningfully reduce risk to the Reserve 
Banks. In addition, the Board noted that the escalation feature is 
rarely triggered since overnight overdrafts are uncommon, and the 
Reserve Banks have other risk-mitigation tools for institutions that 
incur frequent overnight overdrafts.
2. Public Comments and Board Response
Public Comments
    Three trade organizations supported the proposed changes to the 
Overnight Overdrafts policy. One of these commenters argued that 
incorporating the Overnight Overdrafts policy as part III of the PSR 
policy would underscore the close relationship between daylight 
overdrafts and overnight overdrafts in an institution's account. The 
remaining two commenters supported the elimination of the fee-
escalation feature of the Overnight Overdrafts policy.
    A payment standards organization raised concerns with the proposal, 
arguing that the proposed changes would disadvantage financial 
institutions that do not participate in the FedNow Service because 
institutions that do not participate in the FedNow Service would 
continue to incur an automatic multiday charge for overnight overdrafts 
occurring before a weekend or a holiday.
Board Response
    The Board believes that overnight overdrafts pose a credit risk to 
the Reserve Banks since there is no assurance that overnight overdrafts 
are

[[Page 75261]]

collateralized. The Board discourages institutions from incurring 
overnight overdrafts by charging a penalty fee and expects that each 
institution effectively manage its master account in order to maintain 
a positive end-of-day balance. In order to manage credit risk posed to 
Reserve Banks, it is important to charge the penalty fee for each 
calendar day that the overnight overdraft is actually outstanding.
    Institutions that opt to participate in the FedNow Service's full 
set of features for sending and receiving instant payment transactions 
involving end-user customers or institutions that will use the FedNow 
liquidity management feature to support the private-sector instant 
payment service can have activity in their master accounts during 
weekends and holidays. Automatically applying a multiday overnight 
overdraft charge may not accurately reflect the number of calendar-day 
overnight overdrafts incurred by these institutions. For example, a 
FedNow Service participant might incur an overnight overdraft on a 
Friday evening but not on the following Saturday or Sunday, in which 
case the FedNow service participant would be charged for one calendar 
day of overnight overdrafts. Conversely, a FedNow Service participant 
might not incur an overnight overdraft on Friday evening but might then 
incur overnight overdrafts on Saturday and Sunday, in which case the 
FedNow Service participant would be charged for two calendar days of 
overnight overdrafts. This is also true of participants in the private-
sector instant payment service.
    By comparison, institutions that do not elect to participate in the 
FedNow Service or the private-sector instant payment service will not 
have activity in their master accounts over the weekends and holidays. 
These institutions will not be eligible to use the FedNow liquidity 
management feature since the feature is only available to support 
instant payments. Accordingly, if an institution that does not 
participate in the FedNow Service or in the private-sector instant 
payment service incurs an overnight overdraft before a weekend or a 
holiday, the overnight overdraft will persist during each calendar day 
that falls on a weekend or holiday. A multiday charge will accurately 
reflect the number of calendar days that the overnight overdraft is 
outstanding.
    The Board is adopting the changes related to the Overnight 
Overdrafts policy as proposed and believes that the changes will 
simplify the policy while charging an overnight overdraft penalty fee 
for the actual number of calendar days that the overnight overdraft is 
outstanding.

E. Technical Changes to Text of the PSR Policy

    The Board also proposed several technical changes and corrections 
to the PSR policy.\38\ These changes are not substantive in nature and 
reflect current practices that the Reserve Banks use to administer the 
PSR policy. The Board did not receive public comments on these proposed 
technical changes. The Board is adopting these changes as proposed.
---------------------------------------------------------------------------

    \38\ First, the Board proposed to revise a sentence in n. 61 (n. 
64 after amendments) 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. The footnote currently 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.'' Second, the Board proposed to 
revise a sentence in n. 76 (n. 79 after amendments) 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 ``highly 
capitalized'' FBOs, not ``well capitalized'' FBOs. The FBO PSR 
capital category of ``highly capitalized'' is for FBOs while ``well 
capitalized'' is the analogous PCA designation for domestic 
institutions.
---------------------------------------------------------------------------

F. Other Comments Received

    In addition to the comments described above, nine commenters 
provided recommendations related to topics on which the Board did not 
seek comment and that were not part of the proposed changes. These 
commenters included two institutions, one academic, two payment 
services operators, and four trade organizations.
    Most of these comments focused on recommendations about the FedNow 
Service, including (i) expanding the availability of the liquidity 
management transfer feature beyond supporting instant payments and 
adding certain controls to this feature,\39\ (ii) clarifying how 
institutions will adapt to seven-day accounting, (iii) making access to 
24x7x365 intraday credit available for institutions that use services 
other than the FedNow Service, (iv) expanding the hours of the National 
Settlement Service or Fedwire Funds Service to align with the FedNow 
Service, (v) expanding access to the discount window on weekends and 
holidays, (vi) adding a legal entity identifier feature to the FedNow 
Service, and (vii) providing the industry educational information about 
the FedNow Service. While the Board addressed many of these concerns 
related to the FedNow Service in its 2020 notice announcing the details 
of the service, the Board has shared the remaining feedback with the 
Reserve Banks that are implementing the service.\40\
---------------------------------------------------------------------------

    \39\ As described in the Board's 2020 notice, the liquidity 
management transfer feature of the FedNow Service will enable FedNow 
Service participants to transfer funds between one another to 
support liquidity needs related to instant payment activity. The 
feature will also 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 participants and a 
joint account. See 85 FR 48522 (Sep. 10, 2020).
    \40\ Other informational materials related to the FedNow Service 
can be found at https://www.frbservices.org/financial-services/fednow.
---------------------------------------------------------------------------

    A trade organization also recommended that the Board revisit the 
segmentation of net debit categories and the associated net debit cap 
multiples. At this time, the Board is not proposing changes regarding 
net debit cap categories or multiples.

III. Regulatory Analyses

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.) 
requires an agency to consider whether its rules will have a 
significant economic impact on a substantial number of small entities. 
Under the RFA, in connection with a final rule, an agency is generally 
required to publish a final regulatory flexibility analysis, unless the 
head of agency certifies that the rule will not have a significant 
economic impact on a substantial number of small entities and the 
agency publishes the factual basis supporting such certification.
    Regardless of whether the RFA applies to the PSR policy per se, for 
the reasons discussed below, the Board certifies that the changes being 
adopted to the PSR policy will not have a significant economic impact 
on a substantial number of small entities.\41\
---------------------------------------------------------------------------

    \41\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    The Board is adopting changes primarily to section II of the PSR 
policy, which governs the provision of intraday credit in accounts at 
the Reserve Banks. Thus, the changes will apply to small entities with 
accounts at the Reserve Banks that request intraday credit from the 
Reserve Banks. Pursuant to regulations issued by the SBA, financial 
institutions with less than $750 million in assets are considered small 
entities for purposes of the RFA.\42\ Based on

[[Page 75262]]

institution call reports and holding company financial reports, as of 
June 2022, approximately 2,400 institutions that maintain Federal 
Reserve master accounts are considered small entities.
---------------------------------------------------------------------------

    \42\ 13 CFR 121.201 (NAICS codes 522110-522190). A financial 
institution's assets are determined by averaging the assets reported 
on its four quarterly financial statements for the preceding year. 
Id. Consistent with the General Principles of Affiliation in 13 CFR 
121.103, the Board counts the assets of all domestic and foreign 
affiliates when determining whether to classify an institution as a 
small entity.
---------------------------------------------------------------------------

    Although the number of small entities to which the changes will 
apply is substantial, the Board does not believe that the changes will 
have a significant economic impact on these small entities. In 
particular, the changes being adopted to the PSR policy do not impose 
any mandatory reporting, recordkeeping, or other compliance 
requirements on entities of any size, including small entities. Rather, 
part II of the PSR policy applies where an institution voluntarily 
requests intraday credit from a Reserve Bank.
    With respect to institutions that voluntarily request intraday 
credit from a Reserve Bank, the Board believes that the changes being 
adopted to the PSR policy regarding collateralized capacity will 
benefit, rather than burden, such institutions (including small 
entities) by expanding access to collateralized capacity and 
simplifying the administrative steps for requesting collateralized 
capacity. In addition, the Board does not expect the clarifications to 
the PSR policy related to uncollateralized intraday to result in 
additional compliance requirements. Similarly, the changes to section 
II of the PSR policy to support the deployment of FedNow should not 
result in additional compliance requirements. Rather, as noted above, 
fees for daylight overdrafts will be lower with the expansion of the 
business day from 22 hours to 24 hours. Similarly, the elimination of 
the fee-escalation feature of the Overnight Overdrafts policy will 
result in lower overnight overdraft fees.

B. 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.\43\
---------------------------------------------------------------------------

    \43\ See The Federal Reserve in the Payments System (issued 
1984; revised 1990 and January 2001), available at https://www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm. Regarding 
the aspects of the proposal that align the PSR policy and the 
Overnight Overdrafts policy with the deployment of the FedNow 
Service, the relevant other service provider is the existing 
private-sector instant payment service backed by a joint account at 
a Reserve Bank.
---------------------------------------------------------------------------

    In the proposal, the Board stated that it does not believe there 
would be adverse effects to other service providers resulting from the 
proposed changes to the PSR policy because the potential for additional 
collateralized intraday credit and uncollateralized intraday credit on 
a 24x7x365 basis afforded by the proposed changes could be used to fund 
payment activity in both the private-sector and Reserve Bank instant 
payment services. One commenter indicated that the competitive impact 
analysis was incomplete because in order to use intraday credit on a 
24x7x365 basis, participants in the private-sector instant payment 
service would have to become participants in the competing service, the 
FedNow Service. This comment is in reference to the FedNow Service 
liquidity management feature, which will allow interbank transfers 
between the master accounts of FedNow Service participants or transfers 
between master accounts and a joint account at a Reserve Bank that 
backs activity in a private-sector instant payment service, for the 
purpose of supporting liquidity needs related to instant payments. In 
its 2020 notice announcing details of the FedNow Service, the Board 
indicated that participants in the private-sector instant payment 
service will be able to access the FedNow liquidity management feature 
even if they do not wish to sign up for the FedNow Service's full set 
of features for sending and receiving instant payment transactions 
involving end-user customers.\44\ Such participants could choose to use 
the FedNow Service solely to support liquidity needs related to payment 
activity in the private-sector instant payment service. The Board 
believes that given this design of the liquidity management feature 
there will not be any direct and material adverse effect on the ability 
of other service providers to compete with the Reserve Banks.
---------------------------------------------------------------------------

    \44\ 85 FR 48522 (Sep. 10, 2020).
---------------------------------------------------------------------------

    Relatedly, the commenter noted that it may be appropriate for the 
Board to consider whether a FedNow Service participant's ability to 
extinguish an overdraft during weekends or holidays creates a unique 
competitive advantage for the Federal Reserve by enabling FedNow 
Service participants to avoid overnight overdraft fees over weekends 
and holidays. The FedNow Service liquidity management feature will 
allow participants in the private-sector instant payment service to 
manage balances in their master accounts during weekends or holidays. 
Through the liquidity management feature, a participant in the private-
sector instant payment service will be able to extinguish an overnight 
overdraft that occurs at the close of the business day Friday or before 
a holiday by transferring excess funds from the joint account backing 
the service to its master account, or by receiving funds in its master 
account through a funding agent. Thus, the Board believes there is no 
direct and material adverse effect to the ability of other service 
providers to compete with the Reserve Banks.
    Finally, the commenter noted that the proposal to calculate 
overdrafts for all institutions based on a 24-hour day penalizes 
institutions that are not FedNow Service participants in that their 
daylight overdraft fees and penalty fees would be higher. As discussed 
earlier in this notice, fees will be lower under a 24-hour business day 
for all institutions, including institutions that do not participate in 
the FedNow Service.

C. 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 Board reviewed the PSR policy 
changes being adopted under the authority delegated to the Board by the 
OMB and concluded that the proposed changes impact the information 
collection under OMB control number 7100-0217 (FR 2226).
    The Board received no comments on the PRA analysis in the proposal.
Final Approval Under OMB Delegated Authority of the Extension for Three 
Years, With Revision, of the Following Information Collection
    Title of Information Collection: Report of Net Debit Cap.
    Collection Identifier: FR 2226.
    OMB Control Number: 7100-0217.
    Frequency: Annually.
    Respondents: Depository institutions.
    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

[[Page 75263]]

FBOs, 27 hours; Self-Assessment Cap: Non-FBOs, 106 hours and FBOs, 14 
hours; and Maximum Daylight Overdraft Capacity, 59 hours.
    General description: 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.\45\ The third resolution is used to 
establish simultaneously a self-assessed net debit cap and maximum 
daylight overdraft capacity. 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 depository institutions with access to the 
discount window that are eligible to request intraday credit.
---------------------------------------------------------------------------

    \45\ 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 changes being 
adopted to the PSR policy 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 changes 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 changes 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 changes to the 
PSR policy, the Board is amending the requirements associated with the 
third resolution so that an eligible institution can request 
collateralized capacity regardless of whether the institution has a 
positive net debit cap. The changes will not increase the estimated 
average hours per response to FR 2226 but will expand the estimated 
number of respondents requesting collateralized capacity under the max 
cap program.

IV. Federal Reserve Policy on Payment System Risk

    The following portion titled ``Federal Reserve Policy on Payment 
System Risk'' will not be published in the Code of Federal Regulations.

Federal Reserve Policy on Payment System Risk

Revisions to Section II.A of the PSR Policy

    The Board will 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 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, 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

[[Page 75264]]

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 will 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 will revise section II.D of the ``Federal Reserve Policy 
on Payment System Risk'' as follows:

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) and 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 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 with 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 
with 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 with 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.

[[Page 75265]]



                          Eligibility Criteria for Requesting a Positive Net Debit Cap
----------------------------------------------------------------------------------------------------------------
                                                              Supervisory rating \63\
PCA designation/ 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 ratings, such as the Uniform Financial Institution 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 cap
  categories but may be eligible for a lower cap category. 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 cap categories but may be eligible for a lower cap category.
  Reserve Banks will assign an institution a ``zero'' net debit cap if supervisory information about 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 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 will revise section II.E of the ``Federal Reserve Policy 
on Payment System Risk'' as follows:

[[Page 75266]]

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 may be 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 will 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 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.
* * * * *
    The Board will modify and add the Policy on Overnight Overdrafts as 
part III to the PSR policy 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.

[[Page 75267]]

    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 E. Misback,
Secretary of the Board.
[FR Doc. 2022-26615 Filed 12-7-22; 8:45 am]
BILLING CODE 6210-01-P