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The evolution of the Federal Reserve's intraday credit policies

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  • Stacy Panigay Coleman
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    Abstract

    One of the Federal Reserve's roles is to provide payment services to depository institutions and to the U.S. Treasury. Many of the nation's transfers of funds--whether they are large-dollar payments for financial market transactions or small-value business and consumer payments--settle through depository institutions' accounts held at the Federal Reserve for reserve-maintenance purposes and transaction processing. If a depository institution has insufficient balances during the day to cover its debits, it will run a negative balance or "daylight overdraft" in its Federal Reserve account until sufficient funds are received later in the day. Because depository institutions generally hold a relatively small amount of funds overnight in their Federal Reserve accounts in relation to the trillions of dollars of payments processed by the Federal Reserve each day, the Federal Reserve extends intraday credit to ensure the smooth functioning of the U.S. payment system. To reduce the risks that depository institutions present to the Federal Reserve through their use of daylight credit and to address the risks that payment systems, in general, present to the banking system and other sectors of the economy, the Federal Reserve Board in 1985 developed a payments system risk (PSR) policy. One of the primary goals of the PSR policy is to control depository institutions' use of Federal Reserve intraday credit, and as the policy has evolved, the Board has adopted specific methods for controlling daylight overdrafts. The history of the Board's PSR policy, trends in daylight overdraft and payment activity, and a possible future policy direction are discussed in this article.

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    File URL: http://www.federalreserve.gov/pubs/bulletin/2002/0202lead.pdf
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    Bibliographic Info

    Article provided by Board of Governors of the Federal Reserve System (U.S.) in its journal Federal Reserve Bulletin.

    Volume (Year): (2002)
    Issue (Month): Feb ()
    Pages: 67-84

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    Handle: RePEc:fip:fedgrb:y:2002:i:feb:p:67-84:n:v.88no.2

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    Keywords: Overdrafts ; Payment systems;

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    Cited by:
    1. William Roberds & Charles M. Kahn, 2004. "Payments Settlement under Limited Enforcement: Private versus Public Systems," Econometric Society 2004 North American Winter Meetings 13, Econometric Society.
    2. Jeffrey M. Lacker, 2003. "Payment system disruptions and the Federal Reserve following September 11, 2001," Working Paper 03-16, Federal Reserve Bank of Richmond.
    3. David C. Mills, Jr. & Travis D. Nesmith, 2007. "Risk and concentration in payment and securities settlement systems," Finance and Economics Discussion Series 2007-62, Board of Governors of the Federal Reserve System (U.S.).
    4. Morten L. Bech & Rodney J. Garratt, 2012. "Illiquidity in the Interbank Payment System Following Wide‚ÄźScale Disruptions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(5), pages 903-929, 08.
    5. Huberto M. Ennis & John A. Weinberg, 2007. "Interest on reserves and daylight credit," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 111-142.
    6. James T. E. Chapman & Antoine Martin, 2007. "Rediscounting under aggregate risk with moral hazard," Staff Reports 296, Federal Reserve Bank of New York.
    7. Julio J. Rotemberg, 2010. "Liquidity needs in economies with interconnected financial obligations," CQER Working Paper 2009-01, Federal Reserve Bank of Atlanta.
    8. Milton Marquis, 2002. "Setting the interest rate," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct11.
    9. Selva Demiralp & Brian Preslopsky & William Whitesell, 2004. "Overnight interbank loan markets," Finance and Economics Discussion Series 2004-29, Board of Governors of the Federal Reserve System (U.S.).

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