Self-assessed cap Non FBOs

Guide to the Federal Reserve’s
Payment System Risk Policy
on Intraday Credit
Effective July 12, 2012

Federal Reserve System
July 2012

This publication is available at
http://www.federalreserve.gov/paymentsystems/psr_relpolicies.htm

i
Table of Contents
Preface............................................................................................................................................ 1
I. Introduction ............................................................................................................................... 2
A. Policy History ......................................................................................................................2
B. Overview of the PSR Policy ................................................................................................5
II. Daylight Overdraft Capacity .................................................................................................. 8
A. Net Debit Caps .....................................................................................................................8
B. Cap Categories.....................................................................................................................9
1.
Zero............................................................................................................................... 9
2.
Exempt-from-filing...................................................................................................... 10
3.
De minimis .................................................................................................................. 10
4.
Self-assessed ............................................................................................................... 11
C. Maximum Daylight Overdraft Capacity......................................................................... 11
1.
General procedure...................................................................................................... 12
2.
Streamlined procedure for certain foreign banking organizations (FBOs) ............... 12
3.
Determination of the max cap amount under general and streamlined procedures .. 13
4.
Collateral pledged for max cap purposes................................................................... 13
5.
Examples of Maximum Daylight Overdraft Capacity ................................................ 14
D. Role of an Institution’s Board of Directors.....................................................................15
E. Cap Resolutions .................................................................................................................16
F. Confidentiality of Cap Information .................................................................................18
III. Collateral ............................................................................................................................... 19
A. Collateral Eligibility..........................................................................................................20
B. Collateral Valuation ..........................................................................................................20
1.
Securities valuation .................................................................................................... 20
2.
Loan valuation ............................................................................................................ 20
3.
Collateral margins...................................................................................................... 21
C. Pledging Collateral............................................................................................................21
1.
Fedwire Securities Service (FSS) ............................................................................... 22
2.
Depository Trust Company (DTC) ............................................................................. 22
3.
Third-Party Custody Pledging Arrangement ............................................................. 23
4.
Borrower-in-Custody of Collateral (BIC) Arrangement ............................................ 23
5.
Foreign Depositories .................................................................................................. 24
6.
Reserve Bank Custody ................................................................................................ 24
7.
In-transit Securities .................................................................................................... 24
D. Withdrawing Collateral ....................................................................................................25
1.
Fedwire Securities Service (FSS) ............................................................................... 25
2.
Depository Trust Company (DTC) ............................................................................. 25
3.
Custodians, BIC Arrangements, and Reserve Bank Custody ..................................... 25
4.
Foreign Depositories .................................................................................................. 26
E. Collateralized Daylight Overdrafts .................................................................................26
1.
Eligibility for zero-priced collateralized daylight overdrafts..................................... 26
2.
Collateral available for daylight overdraft purposes ................................................. 27
F. Reserve Bank PSR Collateral Requirements ..................................................................27

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G. Collateral Monitoring .......................................................................................................28
1.
Intraday monitoring.................................................................................................... 28
2.
Ex post monitoring ..................................................................................................... 29
IV. Daylight Overdraft Monitoring and Management............................................................ 30
A. Daylight Overdraft Measurement ...................................................................................30
B. Monitoring Compliance with the PSR Policy .................................................................31
1.
Consequences of policy violations.............................................................................. 32
C. Real-time Monitoring and the Account Balance Monitoring System (ABMS) ...........32
D. Ex Post Monitoring ...........................................................................................................34
V. Daylight Overdraft Fees ........................................................................................................ 35
A. Calculation of Daylight Overdraft Charges ...................................................................35
B. Example of Daylight Overdraft Charge Calculation .....................................................35
1.
Calculation of end-of-minute uncollateralized daylight overdraft ............................. 36
2.
Calculation of daily daylight overdraft charge .......................................................... 36
3.
Calculation of reserve maintenance period charge and application of fee waiver.... 36
C. Billing and Adjustments ...................................................................................................38
1.
Assessment of charges ................................................................................................ 38
D. Institutions Subject to Daylight Overdraft Penalty Fees ..............................................39
VI. Special Situations .................................................................................................................. 40
A. U.S. Branches and Agencies of Foreign Banking Organizations ..................................40
1.
U.S. capital equivalency ............................................................................................. 40
2.
Allocation of caps ....................................................................................................... 41
B. Industrial Banks and Industrial Loan Companies Subject to the BHCA Exception .43
C. Institutions Subject to Daylight Overdraft Penalty Fees ..............................................44
1.
Edge Act and agreement corporations ....................................................................... 44
2.
Bankers’ banks ........................................................................................................... 44
3.
Limited-purpose trust companies ............................................................................... 45
4.
Government-sponsored enterprises (GSEs) and international organizations ........... 45
VII. Self-Assessment Procedures ............................................................................................... 46
A. Creditworthiness Component ..........................................................................................46
B. Intraday Funds Management and Control .....................................................................51
C. Customer Credit Policies and Controls...........................................................................53
D. Operating Controls and Contingency Procedures .........................................................57
E. Overall Self-Assessment Rating .......................................................................................60
Appendix A: Self-Assessment Worksheets ............................................................................ 61
Appendix B: Sample Letters and Resolutions ....................................................................... 93
Appendix C: Capital Measures............................................................................................... 101
Glossary ..................................................................................................................................... 103

Preface 1
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Preface
The Guide to the Federal Reserve’s Payment System Risk Policy on Intraday Credit was
developed to assist depository institutions in complying with the Federal Reserve Policy on
Payment System Risk (PSR policy). 1 The Board adopted the PSR policy to address the risks that
payment and settlement activity present to the financial system and to the Federal Reserve Banks
(Reserve Banks).
The Guide contains detailed information on the steps necessary for depository institutions
to comply with the Federal Reserve’s policies on intraday credit (part II of the PSR policy). Any
institution using Federal Reserve intraday credit, regardless of the amount, should monitor its
Federal Reserve account balance on an intraday basis and should understand the risks and costs
inherent in the provision of payment services generally.
Users of the Guide should be aware that the information it contains is based on the PSR
policy effective at the time of publication. If the Board modifies the PSR policy, the revised
policy will supersede information in the Guide until it can be updated accordingly.

1

Available at http://www.federalreserve.gov/paymentsystems/psr_policy.htm.

Introduction 2
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I. Introduction
The Federal Reserve Board (the Board) developed the PSR policy to address the risks
that payment systems present to the Federal Reserve Banks, to the banking system, and to other
sectors of the economy. The Board’s intraday credit policy objective is to attain an efficient
balance among the costs and risks associated with the provision of Federal Reserve intraday
credit, including the comprehensive costs and risks to the private sector of managing Federal
Reserve account balances, and the benefits of intraday liquidity.
An integral component of the PSR policy is a program to govern depository institutions’
use of intraday Federal Reserve credit, or “daylight overdrafts,” which is the primary focus of
this document. 2 A daylight overdraft occurs when an institution’s Federal Reserve account is in
a negative position at any point during the business day.
A. Policy History
The Federal Reserve first published a policy on risks in large-dollar payment systems in
1985. This policy required all institutions incurring daylight overdrafts in their Federal Reserve
accounts as a result of Fedwire® funds transfers to establish a maximum limit, or net debit cap,
on those overdrafts. 4
3

In subsequent years, the Federal Reserve expanded the original PSR policy by addressing
risk controls for other payment types, including automated clearinghouse (ACH) transfers and
book-entry securities transfers. 5 The PSR policy also has been expanded to address risk controls
for other payment systems, including large-dollar multilateral netting systems and certain private
securities clearing and settlement systems. 6 In addition, the Federal Reserve made several
modifications to the original PSR program that include reductions to net debit cap levels, the
creation of an exempt status for institutions that incur only minimal daylight overdrafts, and
changes to the calculation of foreign banking organizations’ (FBOs’) U.S. capital equivalency. 7
In 1994, the Board began assessing a fee of 24 basis points for an institution’s average
daily overdrafts in excess of a deductible of 10 percent of the institution’s risk-based capital. 8
The purpose of the fee was to induce behavior that would reduce risk and increase efficiency in
the payment system. At the same time, to facilitate the pricing of daylight overdrafts, the Board
2

In the PSR policy, the term “institution” refers to entities defined as “depository institutions” in 12 U.S.C.
461(b)(1)(A), U.S. branches and agencies of foreign banking organizations, Edge Act and agreement corporations,
bankers’ banks that have not waived their exemption from reserve requirements, limited-purpose trust companies,
government-sponsored enterprises, and international organizations, unless the context indicates a different reading.
3
See 50 FR 21120, May 22, 1985.
4
The Fedwire Funds Service is a large-dollar electronic payment system owned and operated by the Federal Reserve
Banks.
“Fedwire” is a registered service mark of the Federal Reserve Banks. A complete list of marks owned by the
Federal Reserve Banks is available at FRBservices.org.
5
See 52 FR 29255, August 6, 1987.
6
See 54 FR 26104, June 21, 1989.
7
See 55 FR 22092, May 31, 1990.
8
See 57 FR 47084, October 14, 1992.

Introduction 3
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modified its method of measuring daylight overdrafts to reflect better the timing of transactions
affecting an institution’s intraday Federal Reserve account balance. 9 This measurement method
incorporates specific account posting times for different types of transactions.
In 1995, the Board raised the daylight overdraft fee to 36 basis points. 10 Because
aggregate daylight overdrafts fell approximately 40 percent after the initial introduction of fees,
the Board did not raise the fee further as was initially contemplated because it was concerned
that further increases could produce market effects contrary to the objectives of the risk-control
program. The Board believed, however, that an increase in the overdraft fee was needed to
provide additional incentives for institutions to reduce overdrafts related to funds transfers. The
Board stated it would evaluate further fee increases two years after it could assess the effects of
the 1995 fee increase.
In 2000, recognizing its obligation to review fees and to consider changes that had
occurred in the banking, payment, and regulatory environment, the Board conducted a broad
review of the Federal Reserve’s intraday credit policies. The Board determined that these policies
appeared to be generally effective in controlling risk to the Federal Reserve and in creating
incentives for institutions to manage their intraday credit exposures. While the Board found that
the policy was generally effective, it identified growing liquidity pressures among certain
payment system participants. Specifically, the Board learned that a small number of financially
healthy institutions regularly found their net debit caps to be constraining, causing them to delay
sending payments and, in some cases, to turn away business.
The Board’s broad review of its intraday credit policies culminated in its 2001 approval
of a policy that allows certain institutions to pledge collateral to their Administrative Reserve
Bank (ARB) to secure daylight overdraft capacity in excess of their net debit caps, subject to
Reserve Bank approval. 11 The net debit cap plus the additional capacity is referred to as the
“maximum daylight overdraft capacity” or “max cap.” This policy also contained changes to the
calculation of net debit caps for U.S. branches and agencies of FBOs to allow certain FBOs to
access increased amounts of intraday credit.
In 2004, the Board announced two policy revisions pertaining to government-sponsored
enterprises (GSEs) and certain international organizations. 12 At that time, Reserve Banks
9

Before the Board’s modification of the daylight overdraft posting rules, Fedwire funds and securities transfers were
posted to institutions’ Federal Reserve accounts as they were processed during the business day (as they still are
today). The net of all Automated Clearing House (ACH) transactions was posted as if the transactions occurred at
the opening of business, regardless of whether the net was a debit or credit balance. All other or “nonwire” activity
was netted at the end of the business day, and if the net balance was a credit, the credit amount was added to the
opening balance. If the net balance was a debit, the debit amount was deducted from the closing balance. Under
this method, an institution could use all of its nonwire net credits to offset any Fedwire funds or securities debits
during the day but postpone the need to cover nonwire net debits until the close of the day.
See 57 FR 47093, October 14, 1992.
10
See 60 FR 12559, March 7, 1995.
11
The Administrative Reserve Bank is responsible for the administration of Federal Reserve credit, reserves, and
risk-management policies for a given depository institution or other legal entity.
See 66 FR 64419, December 13, 2001.
12
See 69 FR 57917, September 28, 2004.

Introduction 4
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processed and posted interest and redemption payments on securities issued by these entities by
9:15 a.m. eastern time each day, even if the issuer had not fully funded its payments. 13 Effective
July, 2006, the Reserve Banks release interest and redemption payments on securities issued by
GSEs and certain international organizations only when the issuer’s Reserve Bank account
contains sufficient funds to cover the payments. This policy change aligned the treatment of
GSEs and international organizations with other account holders that do not have regular access
to the discount window by applying penalty fees to any daylight overdrafts these institutions
incur.
In 2004, the Board approved changes to the PSR policy, addressing risk management in
payment and securities settlement systems. The Board adopted the Core Principles for
Systemically Important Payment Systems (Core Principles) and the Recommendations for
Securities Settlement Systems (RSSS) as the minimum standards for systemically important
payment and securities settlement systems, respectively. 14 At the same time, the Board revised
its general risk-management expectations for all systems subject to the policy, including Federal
Reserve payment and securities settlement systems such as the Fedwire Funds Service and
FedACH®. 15 The action also modified the introduction to the policy, reordered the first two
sections of the policy, and deleted the third section of the policy, which contained guidance on
the use of rollovers and continuing contracts in the federal funds market. The Board determined
that institutions have the appropriate incentives to incorporate the guidance into their intraday
credit procedures and that specific guidance is no longer necessary.
In 2007, the Board approved changes to part I of the PSR policy that revised the
expectations for systemically important payment and settlement systems subject to the policy and
updated and clarified the policy with regard to central counterparties. 16 Under the revised policy,
the Board adopted the Recommendations for Central Counterparties (RCCP) and set an
expectation that systemically important payment and settlement systems subject to the Board's
authority periodically complete and disclose publicly self-assessments against the relevant
principles and minimum standards set forth in the policy.
In 2008, the Board adopted major revisions to part II of the PSR policy designed to
improve intraday liquidity management and payment flows for the banking system, while also
helping to mitigate the credit exposures of the Federal Reserve Banks. 17 The changes include a
new approach that explicitly recognizes the role of the central bank in providing intraday
balances and credit to healthy depository institutions, a zero fee for collateralized daylight
overdrafts, a 50 basis point (annual rate) charge for uncollateralized daylight overdrafts, and a
biweekly daylight overdraft fee waiver of $150. In addition, the Board adopted changes to other
elements of the PSR policy dealing with daylight overdrafts, including adjusting net debit caps,
13
14
15

All times noted in this document are in eastern time.
See 69 FR 69926, December 1, 2004.
“FedACH” is a registered service mark of the Federal Reserve Banks. A complete list of marks owned by the
Federal
Reserve Banks is available at FRBservices.org.
16
See 72 FR 2518, January 19, 2007.
17
See 73 FR 79109, December 24, 2008.

Introduction 5
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eliminating the current deductible for daylight overdraft fees, and increasing the penalty daylight
overdraft fee to 150 basis points (annual rate). The changes became effective March 24, 2011. 18
B. Overview of the PSR Policy
The PSR policy aims to foster the safety and efficiency of payment and settlement
systems. These policy objectives are consistent with (1) the Board’s long-standing
objectives to promote the integrity, efficiency, and accessibility of the payment system;
(2) industry and supervisory methods for risk management; and (3) internationally
accepted risk-management principles and minimum standards for systemically important
payment and settlement systems. 19
Through this policy, the Board expects financial system participants, including the
Reserve Banks, to reduce and control settlement and systemic risks arising in payment
and settlement systems, consistent with the smooth operation of the financial system.
The PSR policy is designed to fulfill that aim by (1) making financial system participants
and system operators aware of the types of basic risks that arise in the settlement process
and the Board’s expectations with regard to risk management, (2) setting explicit riskmanagement expectations for systemically important payment and settlement systems,
and (3) establishing the policy conditions governing the provision of Federal Reserve
intraday credit to account holders. 20
Part I of the PSR policy sets out the Board’s views, related principles, and
minimum standards for managing risks in payment and settlement systems, including
those operated by the Reserve Banks that expect to settle a daily aggregate gross value
exceeding $5 billion on any day during the next twelve months. 21
The policy requires systems within the scope of the policy to implement a riskmanagement framework appropriate for the risks a system poses to the system operator,
system participants, and other relevant parties, as well as the financial system more
broadly. In particular, the policy requires that a risk-management framework (1) clearly
identify risks and set sound risk-management objectives, (2) establish sound governance
arrangements, (3) establish clear and appropriate rules and procedures, and (4) employ
18
19

See 75 FR 60749, October 1, 2010.
For the Board’s long-standing objectives in the payment system, see “The Federal Reserve in the Payments
System,” September 2001, FRRS 9-1550.
20
Basic risks in the payment and settlement systems are credit risk, liquidity risk, operational risk and legal risk.
The Board’s PSR policy in no way diminishes the primary responsibilities of financial system participants generally
and settlement system operators, participants, and Federal Reserve account holders more specifically, to address the
risks that may arise through their operation of, or participation in, payment and settlement systems.
21
For purposes of the policy, a payments or securities settlement system is considered to be a multilateral
arrangement (three or more participants) among financial institutions for the purpose of clearing, netting, and/or
settling payments, securities, or other transactions among themselves or between each of them and a central party,
such as a system operator or central counterparty. A system includes all of the governance, management, legal, and
operational arrangements used to effect settlement as well as the relevant parties to such arrangements, such as the
system operator, system participants, and system owners.

Introduction 6
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the resources necessary to achieve the system’s risk-management objectives and
implement effectively its rules and procedures. In addition, the policy requires that
systems deemed systemically important by the Board comply with more-detailed riskmanagement standards set out in the policy. The policy also encourages systems not
within the scope of the policy to consider implementing some or all of the policy’s
elements of a sound risk-management framework.
The Board will be guided by this policy in conjunction with relevant laws and other
Federal Reserve policies, when (1) supervising state member banks, bank holding companies,
and clearinghouse arrangements, including the exercise of authority under the Bank Service
Company Act, where applicable, (2) setting the terms and conditions for the use of Federal
Reserve payment and settlement services by system operators and participants, (3) developing
and applying policies for the provision of intraday credit to Reserve Bank account holders, and
(4) interacting with other domestic and foreign financial system authorities on payments and
settlement risk-management issues. In particular, the policy states the Board’s intention to work
with other domestic and foreign financial system authorities to promote effective risk
management in payments and securities settlement systems.
Part II of this policy governs the provision of daylight overdrafts in accounts at the
Reserve Banks and sets out the general methods used by the Reserve Banks to control their
intraday credit exposures. The Reserve Banks provide temporary, intraday credit to healthy
depository institutions, predominantly through collateralized daylight overdrafts.
The Reserve Banks face credit risk should institutions be unable to fund their daylight
overdraft position in their Federal Reserve accounts before the end of the day. If an institution
were to fail after sending a funds transfer, for example, that left its account in an overdraft
position, the Federal Reserve would be obligated to cover the payment and bear any resulting
losses. The Federal Reserve’s exposure in such instances could be significant. Aggregate
daylight overdraft data are available at
http://www.federalreserve.gov/paymentsystems/psr_data.htm.
The PSR policy enables Reserve Banks to control their exposure to credit risk in four
ways. First, institutions that access intraday credit must satisfy safety and soundness
requirements. In general, institutions that do not meet safety and soundness requirements are not
given access to intraday credit. Lending to healthy institutions reduces the risk of loss to the
Reserve Banks because these institutions do not pose a high risk of an intraday failure. Second,
the PSR policy establishes limits on the amount of Federal Reserve intraday credit that an
institution may use. These limits are sufficiently flexible to reflect the overall financial condition
and operational capacity of each institution using Federal Reserve payment services. Third, the
policy permits Reserve Banks to protect themselves from risk exposure of individual institutions
through such measures as actively monitoring and restricting account activity, removing intraday
capacity, or imposing collateral requirements. Fourth, the policy provides incentives for
institutions with regular access to the discount window to pledge collateral voluntarily to secure
daylight overdrafts. Institutions with regular access to the discount window that secure their use

Introduction 7
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of intraday credit with collateral are not charged for their fully collateralized daylight overdrafts.
Because the Board continues to recognize explicitly the risks inherent in the provision of
intraday credit, institutions that incur uncollateralized overdrafts will be charged a fee. In
applying this fee, the Board anticipates that over time, institutions will elect to pledge collateral
to secure daylight overdrafts rather than incur fees for their use of intraday credit.
The Board expects institutions to manage their Federal Reserve accounts and to not
exceed their intraday credit limits.

Daylight Overdraft Capacity 8
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II. Daylight Overdraft Capacity
A daylight overdraft results when an institution has insufficient funds in its Federal
Reserve account to cover its settlement obligations stemming from funds or book-entry securities
transfers or from other payment activity processed by the Federal Reserve, such as check,
National Settlement Service (NSS), or Automated Clearing House (ACH) transactions. The
Federal Reserve measures daylight overdrafts in institutions’ Federal Reserve accounts to
determine an institution’s compliance with the PSR policy and to calculate daylight overdraft
fees.
Under the Federal Reserve’s PSR policy, each institution that maintains an account at a
Federal Reserve Bank is assigned or may establish a net debit cap, which limits the amount of
intraday Federal Reserve credit that the institution may use during a given interval. The policy
allows financially healthy institutions that are eligible to have regular access to the discount
window to incur daylight overdrafts in their Federal Reserve accounts up to their individual net
debit caps. 22 In addition, the policy allows certain institutions to pledge collateral to the Federal
Reserve to access daylight overdraft capacity above their net debit caps. In these instances, the
institution can incur daylight overdrafts up to the value of its net debit cap plus any applicable
collateralized capacity authorized by the Reserve Bank. As discussed in Section V of this guide,
institutions that are eligible for regular access to the discount window are only charged for
uncollateralized daylight overdrafts. With the exception of institutions that apply for and are
granted a max cap by their Reserve Bank as discussed in Part C of this section, the amount of
collateral pledged does not impact the amount of an institution’s net debit cap.
This section discusses the steps involved in establishing a net debit cap, the process for
applying for additional daylight overdraft capacity, the responsibilities of an institution’s board
of directors, the procedures for filing a net debit cap resolution, and the role of regulatory
agencies. Institutions considered “special situations” should consult section VI of this manual
for more information on net debit caps. 23
A. Net Debit Caps
An institution’s net debit cap refers to the maximum dollar amount of daylight overdrafts
that it may incur in its Federal Reserve account. An institution’s cap category and its capital
measure determine the dollar amount of its net debit cap. 24 An institution’s net debit cap is
calculated as its cap multiple times its capital measure:

22

Institutions that have regular access to the discount window are those institutions that are eligible to borrow from
the
discount window under normal operating conditions.
23
Institutions considered “special situations” include U.S. branches and agencies of foreign banks, nonbank banks,
industrial banks, GSEs, certain international organizations, and other institutions that lack regular access to the
discount window.
24
Information on capital measures for different types of institutions and related regulatory reports is provided in
appendix C.

Daylight Overdraft Capacity 9
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net debit cap = cap multiple x capital measure
Because an institution’s net debit cap is a function of its capital measure, the dollar
amount of the cap will vary over time as the institution’s capital measure changes. An
institution’s cap category, however, normally does not change within a one-year period.
The policy defines six cap categories: zero, exempt-from-filing, de minimis, average,
above average, and high. Each cap category is associated with a cap multiple, as shown in table
II-1 below.
Table II-1
Cap Multiple Table
Cap Categories

Cap Multiples

Zero
0.0
Exempt-from-filing*
$10 million/0.20
De minimis
0.40
Average
1.125
Above average
1.875
High
2.25
*The net debit cap for the exempt-from-filing category is equal
to the lesser of $10 million or 0.2 multiplied by a capital measure.

B. Cap Categories
An institution can establish a positive net debit cap by submitting to its Reserve Bank at
least once a year a copy of its board of directors’ resolution, or it can be assigned a cap category
by its Reserve Bank. Generally, only those institutions that regularly incur daylight overdrafts
greater than $10 million or 20 percent of their capital measure are required to file an annual
board of directors’ cap resolution. Institutions that do not file cap resolutions are assigned either
an exempt-from-filing or a zero cap category. The Reserve Bank will notify the institution if it
qualifies for an exempt-from-filing cap. If an institution has any questions regarding its cap, the
institution should contact its Reserve Bank.
1. Zero
An institution with a net debit cap of zero may not incur daylight overdrafts in its Federal
Reserve account. Some institutions have established management policies that prohibit daylight
overdrafts. Such institutions may adopt a voluntary zero cap but are not required to do so by
Federal Reserve policy. An institution may adopt a zero cap by sending a letter to its Reserve
Bank. The zero cap will remain in effect until the institution files a cap resolution for a different
cap category or until the institution requests an exempt-from-filing cap.

Daylight Overdraft Capacity 10
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In other cases, a Reserve Bank may assign an institution a zero cap. Institutions that may
pose special risks to the Federal Reserve, such as those that are not eligible for regular access to
the discount window, those incurring daylight overdrafts in violation of the Federal Reserve’s
PSR policy, or those in weak financial condition, are generally assigned a zero cap. Recently
chartered institutions may also be assigned a zero cap. An institution that has been assigned a
zero cap as a result of recurring daylight overdrafts in excess of its cap may be assigned a higher
cap if the institution corrects its recurring overdrafts and is considered to be in healthy financial
condition. An institution seeking to be assigned to a cap category that requires the approval of its
board of directors (de minimis or self-assessed) should confirm its eligibility with the Reserve
Bank before proceeding to obtain approval from its board of directors.
2. Exempt-from-filing
The exempt-from-filing category permits an institution to incur daylight overdrafts up to
the lesser of $10 million or 20 percent of its capital measure. If a Reserve Bank determines that
an institution is eligible for exempt status, it will assign this category without requiring any
additional documentation. As a result, the exempt-from-filing cap category substantially reduces
the administrative burden associated with obtaining a net debit cap. The majority of institutions
that maintain Federal Reserve accounts are in the exempt-from-filing category.
To be eligible for the exempt-from-filing cap category, an institution must be in healthy
financial condition and should use only minimal amounts of Federal Reserve intraday credit.
Specifically, an institution’s daylight overdraft history should show only rare overdrafts of more
than $10 million or 20 percent of its capital measure, whichever amount is smaller. Any
overdrafts above this limit should occur no more than twice in a four-week period (two
consecutive two-week reserve maintenance periods). An institution may contact its Reserve
Bank for verification that it has been granted or is eligible for the exempt status.
An institution with a new Federal Reserve account may be eligible for exempt status if it
is considered to be in healthy financial condition. Furthermore, if an institution with an exemptfrom-filing cap category later determines that it requires more daylight overdraft capacity, it may
file a cap resolution for a higher net debit cap. Institutions in the exempt-from-filing cap
category are not required to renew their caps annually. Reserve Banks will monitor the financial
condition of institutions to ensure they continue to qualify for the exempt-from-filing net debit
cap.
3. De minimis
Institutions that incur daylight overdrafts up to 40 percent of their capital measure may
qualify for a de minimis net debit cap. To ease the burden of performing a self-assessment, the
PSR policy allows a financially healthy institution to incur daylight overdrafts of up to 40
percent of its capital measure if the institution submits a board of directors resolution. An
institution with a de minimis cap must submit to its Reserve Bank at least once in each twelvemonth period a copy of its board of directors’ resolution (or a resolution by its holding
company’s board) approving the institution’s use of intraday credit up to the de minimis level. If

Daylight Overdraft Capacity 11
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an institution with a de minimis cap exceeds its cap during a two-week reserve-maintenance
period, its Reserve Bank will counsel the institution and decide whether the de minimis cap
should be maintained or the institution will be required to perform a self-assessment for a higher
cap.
4. Self-assessed
To establish a net debit cap in the high, above average, or average category, an institution
must perform a self-assessment of its creditworthiness, intraday funds management and controls,
customer credit policies and controls, and operating controls and contingency procedures. The
results of the self-assessment should indicate the appropriate cap category for the institution.
The institution’s (or its holding company’s) board of directors should review and approve
the institution’s self-assessment and recommended cap category. The directors’ approval must be
communicated to the Reserve Bank by submission of a board of directors’ resolution (appendix
B provides a sample resolution). The Reserve Bank will review the cap for appropriateness, in
conjunction with the institution’s primary regulator. Should the Reserve Bank determine that the
cap resolution is not appropriate, it will advise the institution to reevaluate the self-assessment
and submit another resolution. The self-assessment process and the board of directors’ review
should be conducted at least once in each twelve-month period.
An institution that experiences a significant change in its financial condition or
organizational structure, such as a merger, acquisition, large charge-off, or increase in loan loss
reserves, is required to review its current cap category with particular focus on creditworthiness
standards. A resolution to establish a different cap category may be submitted by the institution
or may be required by the Reserve Bank, before the annual renewal date if circumstances warrant
such a change.
Details of the self-assessment process are provided in section VII and appendix A of this
manual. Other institutions, such as those in the zero, exempt-from-filing, or the de minimis cap
categories, may also find it helpful to review certain sections of the self-assessment procedures,
which contain information on evaluating the effectiveness of controls over payment processing.
C. Maximum Daylight Overdraft Capacity
The PSR policy recognizes that while net debit caps provide sufficient liquidity to most
institutions, some institutions may still experience liquidity pressures. To relieve these pressures,
certain institutions with self-assessed net debit caps may pledge collateral to the Federal Reserve
to secure daylight overdraft capacity in excess of their net debit caps, subject to Reserve Bank
approval. The net debit cap plus the additional capacity is referred to as the “maximum daylight
overdraft capacity” or “max cap.” This policy is intended to provide extra liquidity through the
use of collateral by the few institutions that might otherwise be constrained.

Daylight Overdraft Capacity 12
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1. General procedure 25
An institution with a self-assessed net debit cap that wishes to expand its daylight
overdraft capacity by pledging collateral should consult with its ARB. 26 Under the general
procedure, institutions are expected to submit the following information when requesting
maximum daylight overdraft capacity:
•

the amount of daylight overdraft capacity requested

•

written justification for requesting additional daylight overdraft capacity

•

a principal contact at the institution.

The Reserve Bank will work with an institution that requests additional daylight overdraft
capacity to determine the appropriate maximum daylight overdraft capacity level. In considering
the institution’s request for maximum daylight overdraft capacity, the Reserve Bank will
evaluate the institution’s rationale for requesting additional daylight overdraft capacity as well as
financial and supervisory information.
An institution approved for a maximum daylight overdraft capacity level under the
general procedure must submit at least once in each twelve-month period a board of directors’
resolution indicating its board’s approval of that level. (Appendix B provides a sample
resolution.) 27
2. Streamlined procedure for certain foreign banking organizations (FBOs)
An FBO that is a FHC or has a SOSA rating of 1 and has a self-assessed net debit cap
may request from its Reserve Bank a streamlined procedure to obtain maximum daylight
overdraft capacity for its U.S. branches and agencies. These FBOs are not required to provide
25

General procedure applies to all institutions, except FBOs obtaining a max cap under the streamlined procedure,
described further in this section.
Institutions with an exempt-from-filing or a de minimis net debit cap are not eligible to apply for maximum
daylight overdraft capacity. Institutions that have been assigned a zero net debit cap by a Reserve Bank also are not
eligible to apply for maximum daylight overdraft capacity. If an institution that qualifies for a positive cap has
adopted a zero cap voluntarily, it must apply for a higher net debit cap before requesting maximum daylight
overdraft capacity.
Institutions may apply for maximum daylight overdraft capacity for daylight overdrafts resulting from Fedwire
funds transfers, Fedwire book-entry securities transfers, National Settlement Service entries, and ACH credit
originations. Institutions incurring daylight overdrafts as a result of other payment activity may be eligible for
administrative
counseling flexibility (See 59 FR 54915, November 2, 1994).
27
Many FBOs do not have the same management structure as U.S. depository institutions, and adjustments should
be made as appropriate. If an FBO’s board of directors has a more-limited role to play in the bank’s management
than a U.S. board has, the maximum daylight overdraft capacity request should be reviewed by senior management
at the FBO’s head office that exercises authority over the FBO equivalent to the authority exercised by a board of
directors over a U.S. depository institution. In cases in which the board of directors exercises authority equivalent to
that of a U.S. board, the request for maximum daylight overdraft capacity should be reviewed by the board of
directors. A depository institution may revise its request for additional collateralized daylight overdraft capacity at
any time, provided there is sufficient justification for doing so.
26

Daylight Overdraft Capacity 13
_________________________________________________________________________
documentation of the business need or a board of directors’ resolution for collateralized capacity
in the amount that exceeds its current net debit cap (which is based on up to 35 percent of
worldwide capital times its cap multiple), as long as the requested total capacity is 100 percent or
less of worldwide capital times the self-assessed cap multiple of the U.S. branch or agency. The
Reserve Bank will assess the ability of eligible FBOs to manage the intraday capacity permitted
by the streamlined max cap as part of its review of relevant financial and supervisory
information. The Reserve Bank, in consultation with the home country supervisor, would engage
in initial as well as periodic dialogue with the institution that would be analogous to the periodic
review of liquidity plans performed with U.S.-chartered institutions to ensure that the
institution’s intraday liquidity risk is managed appropriately. 28 If an eligible FBO requests
capacity in excess of 100 percent of worldwide capital times the self-assessed cap multiple of its
U.S. branch or agency, it would be subject to the general procedure.
3. Determination of the max cap amount under general and streamlined procedures
The Reserve Bank’s approval of an institution’s request for additional daylight overdraft
capacity is an approval for a maximum level of daylight overdraft capacity. The maximum
daylight overdraft capacity is defined as follows:
maximum daylight overdraft capacity = net debit cap + collateralized capacity. 29
The institution’s maximum daylight overdraft capacity limit is equal to its net debit cap
plus its collateralized capacity. The institution is expected to avoid incurring daylight overdrafts
that would exceed this limit. The Reserve Banks will review the status of any institution that
exceeds its maximum daylight overdraft capacity limit during a single day and will decide if the
maximum daylight overdraft capacity should be maintained or if additional action should be
taken (see section IV.B.).
4. Collateral pledged for max cap purposes
All collateral that institutions pledge to the Reserve Banks must be acceptable to the
Reserve Banks. 30 A self-assessed institution that has been approved for maximum daylight
28

The liquidity reviews will be conducted by the administrative Reserve Bank. The liquidity review may include,
but is not limited to, verification of the FBO’s most-recent capital information; FHC/SOSA status; review of recent
examinations/reviews and/or internal and external audits of payment system and electronic funds transfer operations,
including the PSR self-assessment documentation, review of funding/liquidity risk framework of the FBO’s U.S.
operations; and consultation with the FBO’s home country supervisor. At its discretion, the ARB may require
additional information from any FBO, including information on the FBO’s global liquidity/funding policies,
procedures, and limits. The ARB may review liquidity management reports, interview the FBO’s management, and
require the FBO to submit periodic liquidity reports in the format determined by the Reserve Bank.
29
Collateralized capacity represents the collateralized component of the maximum daylight overdraft capacity
approved by the Reserve Bank. The amount of collateralized capacity cannot exceed the difference between the
institution’s maximum daylight overdraft capacity level and its net debit cap. For example, if an institution’s singleday net debit cap increases as a result of an increase in capital at the institution, its maximum daylight overdraft
capacity is unchanged, so its collateralized capacity is reduced. The institution’s overdraft position will be measured
against the lesser of (1) its maximum daylight overdraft capacity or (2) its net debit cap plus the amount of collateral
pledged.

Daylight Overdraft Capacity 14
_________________________________________________________________________
overdraft capacity may, at any time, pledge more or less collateral than the collateralized
capacity. Pledging less collateral reduces the effective maximum daylight overdraft capacity
level; however, pledging more collateral will not increase the maximum daylight overdraft
capacity above the approved level. Collateral pledged to support a max cap offsets daylight
overdraft fees and is used to determine fully collateralized cap breach waivers. 31 For more
information on collateral, refer to the Collateral section (III) of this Guide.
5. Examples of Maximum Daylight Overdraft Capacity
Institution's parameters:
• Net debit cap = $20 billion
• Reserve Bank-approved max cap = $25 billion
• Collateralized capacity = up to $5 billion
Example 1: Compliance with PSR policy:
• Collateral pledged* = $10 billion
• Effective max cap** = $25 billion
• Average daylight overdraft on given day = $23 billion
Outcome: The institution is in compliance with the PSR policy and does not breach its max cap.
Example 2: Max cap breach:
• Collateral pledged* = $2 billion
• Effective max cap** = $22 billion
• Average daylight overdraft on given day = $23 billion
Outcome of max cap breach: The institution breaches its max cap and is not in compliance
with the PSR policy.
Example 3: Fully collateralized max cap breach:
• Collateral pledged* = $10 billion
• Effective max cap** = $25 billion
30

Collateral eligibility and margins are the same for PSR policy purposes as for the discount window. See the
Federal Reserve Collateral Guidelines available at http://www.frbdiscountwindow.org/frcollguidelines.pdf for more
information. The Reserve Banks may accept securities in transit on the Fedwire book-entry securities system as
collateral to support a max cap or to secure daylight overdrafts for a zero fee under the PSR policy. Securities in
transit refers to book-entry securities transferred over the Fedwire Securities Service that have been purchased by a
depository institution, but not yet paid for and owned by the institution’s customers.
Under some circumstances, collateral availability may differ for discount window and PSR purposes, such as max
cap. For example, during periods when the Federal Reserve authorizes term lending, institutions requesting an
advance of more than 28 days need to hold an additional 33 percent of collateral in excess of the collateral required
for the advance. This additional collateral will not be available for discount window purposes but will be available
for PSR purposes, including supporting a max cap, securing daylight overdrafts for a zero fee, and qualifying for a
fully collateralized cap breach waiver, if eligible.
31
For more information on fully collateralized cap breach waivers, refer to part B of the Daylight Overdraft
Monitoring and Management section (IV) of this Guide.

Daylight Overdraft Capacity 15
_________________________________________________________________________
•

Average daylight overdraft on given day = $27 billion

Outcome 2: The institution breaches its max cap and may be eligible for a fully collateralized
cap breach waiver (up to two within two consecutive reserve maintenance periods). For more
information on fully collateralized cap breach waivers, refer to part B of the Daylight Overdraft
Monitoring and Management section (IV) of this Guide.
*The example assumes collateral levels are held constant throughout the day.
** An institution’s effective max cap is the lesser of (1) an institution’s Reserve Bank-approved
max cap or (2) an institution’s net debit cap plus the amount of collateral pledged to secure the
collateralized capacity.
D. Role of an Institution’s Board of Directors
The Federal Reserve expects the board of directors of an institution to establish and
implement policies to ensure that its management follows safe and sound operating practices,
complies with applicable banking laws, and prudently manages financial risks. Given these
responsibilities, the directors play a vital role in the Federal Reserve’s efforts to reduce risks
within the payment system.
As part of the PSR policy, the Federal Reserve expects an institution’s board of directors,
at a minimum, to accept the following responsibilities:
•

Understand the institution’s practices and controls regarding the risks assumed when
processing transactions for its own account and the accounts of its customers or
respondents.

•

Establish prudent limits on the daylight overdrafts that the institution incurs in its
Federal Reserve account and on privately operated clearing and settlement systems.

•

Periodically review the frequency and dollar levels of daylight overdrafts to ensure
that the institution operates within the guidelines established by its board of directors.
Directors should be aware that, under the Federal Reserve’s PSR policy, repeated
policy violations could lead to reductions in the institution’s daylight overdraft
capacity, as well as the imposition of restrictions on its Federal Reserve account
activity that could affect the institution’s operations.

The directors may appoint a committee of directors to focus on the institution’s
participation in payment systems and its use of intraday credit. Furthermore, a higher-level
board of directors of the same corporate family may conduct a self-assessment review and
approve a resolution. For example, the board of directors of the parent company of a bank
holding company may review the self-assessment and request a net debit cap for one or more of
its banking subsidiaries. The board of directors should be aware that delegating the review
process to a committee or higher level board does not absolve the directors from the

Daylight Overdraft Capacity 16
_________________________________________________________________________
responsibilities outlined in the Federal Reserve’s PSR policy. The directors may not delegate this
responsibility to an outside consultant or third-party service provider.
For institutions requesting daylight overdraft capacity above their net debit caps, the
board of directors must understand the reasons the institution is requesting additional daylight
overdraft capacity, the amount of the collateralized capacity, and the total amount of the net debit
cap plus collateralized credit. 32
The Federal Reserve recognizes that the boards of directors of U.S. branches and
agencies of FBOs do not necessarily serve in the same capacity as boards of directors of
institutions in the United States. Therefore, individuals who are responsible for formulating
policy at the FBO’s head office may substitute for the board of directors in performing the
responsibilities specified in the PSR policy.
E. Cap Resolutions
The policy requires a board of directors’ resolution to establish a cap in the de minimis or
self-assessed (average, above average, or high) cap categories or to establish maximum daylight
overdraft capacity under the general procedure. 33 These resolutions must follow a prescribed
format. Specifically, resolutions must include the following: (1) the official name of the
institution, (2) the city and state in which the institution is located, (3) the date the board acted,
(4) the cap category adopted, (5) the appropriate official signature, and (6) the routing number of
the institution associated with its Federal Reserve master account. For a board resolution
approving the results of a self-assessment, the resolution must identify the ratings assigned to
each of the four components of the self-assessment as well as the overall rating used to determine
the actual net debit cap. In addition, the institution should indicate if it did not use the
Creditworthiness Matrix approach in determining its creditworthiness rating (appendix B
provides sample resolutions).
An institution’s primary supervisor may review the resolutions and any information or
materials used by the institution’s directors in fulfilling their responsibilities. Supporting
documentation used in determining an appropriate cap category must be maintained at the
institution. Under the PSR policy, the resolution and supporting documentation must be made
available to the institution’s supervisory examiners. At a minimum, the institution’s “cap
resolution file” must contain the following items:

32

While FBOs requesting streamlined max caps are not required to provide the board of directors resolution for the
max cap, the Federal Reserve believes that it is important for the FBO’s board to be aware of the institution’s
daylight overdraft capacity limits with the Federal Reserve.
33
FBOs obtaining maximum daylight overdraft capacity under the streamlined procedure are not required to provide
to the Reserve Bank a board of directors’ resolution authorizing the level of the maximum daylight overdraft
capacity but must provide the board of directors’ approval of the self-assessed cap level.

Daylight Overdraft Capacity 17
_________________________________________________________________________
•

an executed copy of the resolution adopting the net debit cap or maximum
daylight overdraft capacity, if the latter is obtained under the general
procedure

•

for institutions with self-assessed caps, copies of management’s selfassessment of creditworthiness, intraday funds management and control,
customer credit policies and controls, and operating controls and contingency
procedures

•

minutes and other documentation that serve as a formal record of any
discussions regarding the self-assessment or the request for maximum
daylight overdraft capacity by the directors, if the max cap is obtained under
the general procedure

•

status reports made available to the board of directors regarding the
institution’s compliance with resolutions adopted by the directors as well as
with the PSR policy

•

other materials that provide insight into the directors’ involvement in carrying
out their responsibilities under the PSR policy, including special studies or
presentations made to the directors

•

for the maximum daylight overdraft capacity resolution, the maximum
daylight overdraft capacity amount

The board of directors’ resolutions for de minimis and self-assessed institutions and for
maximum daylight overdraft capacity are valid for one year after the Reserve Bank approves the
net debit cap or the maximum daylight overdraft capacity amount. An institution with a de
minimis cap must renew its cap resolution annually by submitting a new resolution to its Reserve
Bank. An institution with a self-assessed cap must perform a self-assessment annually and
submit an updated cap resolution to its Reserve Bank. An institution with a maximum daylight
overdraft capacity amount must perform a self-assessment annually and submit an updated
maximum daylight overdraft capacity board of directors’ resolution and documentation of the
institution’s business need for its max cap to its Reserve Bank annually if it obtains the max cap
under the general procedure. In conjunction with an institution’s primary supervisor, the Reserve
Bank reviews each resolution for appropriateness.
Because institutions may, in some cases, require considerable time to complete and
approve their self-assessments, institutions should be aware of the expiration date of their cap
resolutions well in advance. If a new cap resolution is not received by the expiration date, an
institution may be assigned a zero cap, which prohibits the institution from using any Federal
Reserve intraday credit.

Daylight Overdraft Capacity 18
_________________________________________________________________________
F. Confidentiality of Cap Information
The Federal Reserve regards cap categories and net debit caps as confidential information
and will share this information only with an institution’s primary supervisor (5 U.S.C. §
552(b)). 34 Institutions are also expected to treat their cap as confidential and should not disclose
this information for marketing purposes. If an institution believes that it must disclose its cap
under securities law, the Federal Reserve does not prohibit such disclosure.

34

For more information on the Freedom of Information Act, see
http://www.federalreserve.gov/generalinfo/foia/foiastat.cfm.

Collateral 19
_________________________________________________________________________
III. Collateral
The PSR policy permits institutions with regular access to the discount window to pledge
collateral voluntarily to secure daylight overdrafts at a zero fee, to support an approved max cap,
and to qualify for fully collateralized cap breach waivers. 35 Additionally, a Reserve Bank may
require an institution to pledge collateral in certain circumstances, such as when an institution
presents heightened risk to the Reserve Bank, or the Reserve Bank determines that an
institution’s account management practices are not sufficient to prevent impermissible daylight
overdrafts. An institution may also pledge collateral to its local Reserve Bank to secure an
extension of credit from the discount window. 36
Under the PSR policy, any type of collateral that is acceptable for discount window
lending is also acceptable for PSR purposes, including stable pool and off-premise collateral at
the discretion of the Reserve Bank. 37 A Reserve Bank may also accept in-transit book-entry
securities as collateral for PSR purposes at its discretion. 38 When an institution pledges
collateral to its Reserve Bank for PSR or discount window purposes, it is placed in a single
Federal Reserve collateral account. 39 The Federal Reserve’s Collateral Management System
(CMS) records and maintains information on the collateral pledged to Reserve Banks, including
tracking intraday pledges and withdrawals, and providing information on collateral eligibility
and valuation. An institution’s Federal Reserve collateral account reflects the total value of
collateral pledged regardless of whether it is actively being pledged for PSR purposes (to secure
intraday credit) or for discount window purposes (to secure overnight lending).
In assessing daylight overdraft charges, the Federal Reserve compares an institution’s
end-of-minute daylight overdraft balance with that institution’s end-of-minute balance of Federal
Reserve collateral less encumbrances, which is the value of an institution’s collateral available
for daylight overdraft purposes. 40 An institution’s collateralized daylight overdrafts is charged a
zero fee, and uncollateralized daylight overdrafts are assessed a fee of 50 basis points.
35

Institutions that are not eligible to borrow from the discount window, such as Edge Act and agreement
corporations, bankers’ banks that are not subject to reserve requirements, limited-purpose trust companies, GSEs,
and certain international organizations, are not eligible for intraday credit and will be assessed a penalty fee for any
collateralized or uncollateralized daylight overdrafts.
For more information on max caps, refer to part C of the Daylight Overdraft Capacity section (II) of this Guide.
For more information on fully collateralized cap breach waivers, refer to part B of the Daylight Overdraft
Monitoring and Management section (IV) of this Guide.
36
Federal Reserve policies and procedures related to discount window lending programs are located at
http://www.frbdiscountwindow.org.
37
For information on types of acceptable collateral, see the Federal Reserve Collateral Guidelines available at
http://www.frbdiscountwindow.org/frcollguidelines.pdf.
38
In-transit securities refer to book-entry securities transferred over the Fedwire Securities Service that have been
purchased
by a depository institution but not yet paid for and owned by the institution’s customers.
39
Institutions may also pledge collateral for Treasury purposes, which may be held in a number of Treasury program
collateral accounts.
40
Collateral pledged and applied for max cap purposes and PSR required collateral are included in the Federal
Reserve collateral account total and are not considered encumbrances. These values are included in the value of
collateral available for daylight overdraft purposes intraday and are applied in calculating an institution’s daylight
overdraft charges. In-transit collateral is not reflected in the value of collateral available for daylight overdraft
purposes intraday but is applied in calculating an institution’s daylight overdraft charges ex post. For more
information on collateral available for daylight overdraft purposes, see part F of this section.

Collateral 20
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A. Collateral Eligibility
Institutions must pledge assets that the Reserve Bank has identified as eligible collateral.
Generally, collateral that is acceptable to the Reserve Bank for discount window lending is also
acceptable for PSR purposes. In determining whether collateral is acceptable, the Reserve Bank
will consider whether assets meet regulatory standards for sound asset quality and other
associated risks. The Federal Reserve provides a detailed list of acceptability criteria on the
discount window and PSR website. 41 This list provides information on general acceptance
criteria applicable for all securities and loans and also outlines the acceptance criteria applicable
by asset type.
B. Collateral Valuation
In general, the Federal Reserve seeks to value all pledged collateral at fair market value.
The Federal Reserve values loans using internal models and typically uses prices supplied by
external vendors for the valuation of securities. The Federal Reserve applies margins to the fair
market value estimates to determine collateral value for the institution. The Federal Reserve’s
margins are based on risk characteristics of the pledged asset, as well as the anticipated volatility
of the fair market value of the pledged asset over an estimated liquidation time frame. The
Federal Reserve publishes its collateral margins table and provides a summary of the Federal
Reserve’s approach to valuing and margining collateral pledged for discount window and
payment system risk purposes on the discount window website. 42
1. Securities valuation
The Federal Reserve typically values securities using prices supplied by external vendors.
If the Federal Reserve can reasonably estimate a value from market information using internal
valuation models, it will assign an internally modeled price to a security if a vendor price cannot
readily be obtained. Pledged securities are subject to daily repricing. Revised collateral values
for securities pledged through FSS and DTC are effective by or before 8:00 a.m. ET each day.
2. Loan valuation
To estimate the value of loan collateral, the Federal Reserve first models the cash flow
characteristics of the loan, and then calculates the fair market value of the loan as the net present
value of these cash flows. When an institution pledges loans to its Reserve Bank, the Federal
Reserve either processes those loans individually as an automated loan deposit (ALD), or in
41
For more information on commonly pledged asset types, see the Federal Reserve Collateral Guidelines available
at http://www.frbdiscountwindow.org/frcollguidelines.pdf. This document is for informational purposes only, is
subject
to change without notice, and is not binding on the Federal Reserve System in any particular transaction.
42
The discount window and PSR collateral margins table is located at
http://www.frbdiscountwindow.org/discountmargins.xls.

Collateral 21
_________________________________________________________________________
aggregate by loan type as a group deposit. If an institution’s loan file is eligible, the Federal
Reserve will record the loans individually using the ALD process and will calculate an internally
modeled fair market value for each loan, based on loan-specific characteristics. 43 If an
institution pledges loans in a group deposit, the Federal Reserve will model a fair market value
using the characteristics of a typical loan pool of the same loan type as the group deposit.
The Federal Reserve's internally modeled fair market value estimates are updated
monthly, effective the first business day of each month, for both individually and group
deposited loans. In addition, Reserve Banks may assign pledged loans a risk rating of “minimal
risk” or “normal risk.” In some cases, loans that are assigned a “minimal risk” rating will
receive a higher collateral value than those that are assigned a “normal risk” rating.
3. Collateral margins
The Federal Reserve estimates margins for securities and loans pledged as collateral
using Value-At-Risk analysis, which develops margins from historical price volatility of assets
within each collateral category. The Federal Reserve may assign a securities margin based on
the type of security, its duration, and its rating. Any security that was not assigned a price by an
external vendor receives the lowest margin from the Federal Reserve’s margins table for that
asset type. The Federal Reserve assigns individually deposited loan margins based on the
individual loan’s type, coupon, and maturity. The Federal Reserve assigns group deposited loans
a single margin based on conservative assumptions about the characteristics of pledged loan
pools. The margin for group deposited loans is equal to or below the margin applied to
comparable loans pledged via individual deposit. The discount window and PSR collateral
margins table is located at http://www.frbdiscountwindow.org/discountmargins.xls.
C. Pledging Collateral
The procedures for pledging collateral under the PSR policy are the same as those for
pledging to the discount window. Institutions interested in pledging collateral for discount
window or PSR purposes must complete certain legal documents (authorizing resolutions and
agreements) with their Reserve Bank, specifically, Operating Circular No.10 documents. 44 All
collateral pledged to a Reserve Bank must be free of any conflicting claims, liens, security

43

Under the Federal Reserve’s enhanced ALD process, institutions may submit a pledged loan listing in one of a
variety of electronic file formats, including Microsoft Excel® spreadsheet software, comma separated files (CSV),
text, and non-imaged portable document format (PDF). All loan types except credit card receivables and student
loans are supported under the ALD process.
44
For more information on filing Operating Circular No. 10 documents institutions should contact their local
Reserve Bank or visit http://www.frbdiscountwindow.org/req_sig.cfm?hdrID=19&dtlID=42.

Collateral 22
_________________________________________________________________________
interests or restrictions upon transfer or pledge to the Reserve Bank. 45 The Reserve Bank must
be able to obtain a perfected first priority security interest in collateral.
Depending on what type of stable pool collateral is pledged, institutions may need to
establish one or more pledging arrangements. Collateral may reside in Fedwire Securities
Service (FSS), at the Depository Trust Company (DTC), at a custodian, at the pledging
institution via a Borrower-In-Custody arrangement (BIC), at a foreign depository, or at the
institution’s Reserve Bank. 46
1. Fedwire Securities Service (FSS)
FSS is the Fedwire book-entry securities system that consists of safekeeping, transfer,
and settlement functions maintained on the books of the Reserve Banks. U.S. Treasury-issued
securities and certain U.S. government agency and GSE-issued securities pledged in electronic
(book-entry) form in FSS may be held by an institution in various securities accounts.
Institutions can initiate a pledge of securities held in FSS online using Fedline® or offline by
contacting Reserve Bank Wholesale Operations staff by phone. 47 If the securities are held by a
correspondent, the correspondent can initiate the pledge. A depository institution must enter a
separate request for each security pledged. Once the request is submitted, it is processed in FSS.
If the security meets eligibility standards, it is deposited and assigned value.
2. Depository Trust Company (DTC)
DTC is a limited-purpose trust company organized under New York law that acts as the
central securities depository for most publicly traded equity securities and many fixed-income
securities in the U.S. market. Each Reserve Bank has established a pledge account with DTC
through which securities may be pledged by institutions. DTC arrangements are used to pledge
eligible securities (such as municipal or corporate debt securities) that institutions hold through
DTC. An institution may directly pledge such securities (if it is a DTC participant) or may
pledge DTC-held securities through a correspondent that is a DTC participant. Institutions
holding securities through correspondents that are DTC participants must direct their
correspondent to initiate the transfer of securities.

45

When instruments, accounts, chattel paper, or intangibles are pledged to secure discount window obligations, a
financing statement (UCC-1) is filed with the appropriate authorities to perfect the Reserve Bank's interest in the
collateral. Reserve Banks conduct lien searches to ensure that no other creditors have filed a UCC-1 covering the
same collateral. An institution may be required to submit a certificate (within appendix 3 to Operating Circular
No.10 for domestic institutions, within appendix 4 for FBOs), which will provide the Federal Reserve Bank with all
of the information needed to make an effective UCC-1 financing statement filing against the borrower. An
institution should contact its Reserve Bank to determine if it must complete the certificate.
46
For more information, visit the Federal Reserve Collateral Guidelines available at
http://www.frbdiscountwindow.org/frcollguidelines.pdf.
47
Contact information for Wholesale Operations staff is available at
http://www.frbservices.org/contactus/fedwire_contacts.html.
“Fedline” is a registered trademark of the Federal Reserve Banks. A complete list of marks owned by the Federal
Reserve Banks is available at FRBservices.org.

Collateral 23
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CMS will screen securities delivered via DTC against collateral eligibility criteria. If
additional information is needed to confirm eligibility or establish appropriate collateral
valuation, Reserve Bank staff may contact the pledging institution.
3. Third-Party Custody Pledging Arrangement
An institution may designate a third-party custodian to provide collateral custody
services. Third-party custody arrangements involve an institution (borrower), another institution
that holds the assets to be pledged (custodian), and the Reserve Bank (lender). A third-party
custodian must not be affiliated with a pledging institution and must be approved by the Reserve
Bank prior to any pledge of collateral. Custodians that are affiliated with the pledging institution
will be considered under the Borrower-In-Custody pledging arrangement. In some cases, an
acceptable custodian may be an entity other than a financial institution. In all cases, however,
the custodian must be in sound financial condition and have acceptable custody controls for the
assets in its possession. 48
4. Borrower-in-Custody of Collateral (BIC) Arrangement
BIC arrangements may be used when an institution is approved by its Reserve Bank to
maintain physical control of the loans either on its own premises or held on the premises of a
custodian. Under this arrangement, institutions or custodians may retain custody of collateral
while pledging it to a Reserve Bank, but the BIC collateral must be designated as being pledged
to the Reserve Bank.
Institutions may qualify for a BIC arrangement at the discretion of the Reserve Bank. 49
Institutions must maintain appropriate document-storage facilities and have an acceptable
automated record/reporting system, which must be capable of identifying the assets subject to the
Reserve Bank’s security interest. Once an institution has pledged loans under a BIC
arrangement, the institution must submit a periodic collateral schedule that identifies assets held
under the BIC arrangement. 50
If an institution no longer qualifies for a BIC arrangement, the Reserve Bank, at its
discretion, may choose to take custody of the collateral either at the Reserve Bank, or under a
field warehouse arrangement at the institution or other approved location.

48

An institution should contact its Reserve Bank to obtain approval of its proposed custodian and must execute
appropriate
agreements to qualify for a third-party custody pledging arrangement.
49
Institutions
must complete the appropriate documentation to qualify for a BIC arrangement.
50
An institution should contact its Reserve Bank to learn what specific information to include on the collateral
schedule and how frequently the schedule should be submitted. If an institution fails to file an updated collateral
schedule by a specified time of the month, it will be notified that an update has not been received and advised that
the BIC collateral will be assigned a zero value after a specified grace period. Some types of BIC collateral may be
subject to more-or-less-frequent updates.

Collateral 24
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5. Foreign Depositories
At its discretion, each Reserve Bank may enter into a custodian arrangement with
Clearstream and Euroclear as necessary to hold foreign-issued or foreign-denominated securities.
If an institution’s Reserve Bank has entered into a custodian arrangement with Clearstream or
Euroclear, and the institution is approved by its Reserve Bank, it may deposit collateral using
Clearstream or Euroclear procedures. Clearstream or Euroclear screens the proposed collateral
against eligibility criteria predetermined by the Federal Reserve. Clearstream and Euroclear
each send the Reserve Bank the current day’s activity to be loaded into CMS once a day. 51
6. Reserve Bank Custody
Reserve Bank custody of collateral is available for custody of tangible assets, such as
promissory notes evidencing commercial/consumer loans. Prior to pledging customer
obligations, an institution should contact its Reserve Bank to discuss the pledging process. The
Reserve Bank may request financial information and other details about the institution’s
customers in order to evaluate the credit quality of the obligations. Generally, customer
obligations are only be acceptable if evidenced by an original document signed by the customer.
This document may take the form of a promissory note or credit agreement that states the
specific terms of the lending agreement. Customer obligations physically delivered to a Reserve
Bank must be in a form that allows the assets to be liquidated without further action by the
institution (endorsement of pledged notes or power of attorney may be required).
7. In-transit Securities
A Reserve Bank may accept in-transit securities as collateral for PSR purposes such as to
secure additional daylight overdraft capacity (max cap), to offset daylight overdraft fees, and to
qualify for a fully collateralized cap breach waiver. 52 In-transit securities are defined as bookentry securities transferred over FSS that have been purchased by a depository institution but not
yet paid for and owned by the institution’s customers.
If a Reserve Bank accepts, and an institution chooses to pledge in-transit securities as
collateral for PSR purposes, the institution will have to record on its books in real time both the
securities that are pledged to the Reserve Bank, and the cash allocated by the institution’s
customers to fund securities transactions. There are special considerations related to in-transit
book-entry securities collateral that must be considered by the depository institution. Pledging
institutions must provide a file to CMS each night containing CUSIP-level, minute-by-minute
data on securities pledged and cash provided by the institution’s customers to fund the securities

51

Additionally, an alternative manual deposit process may be used for Euroclear. See the Federal Reserve
Collateral Guidelines at http://www.frbdiscountwindow.org/frcollguidelines.pdf for more information.
52
For more information on max caps, refer to part C of the Daylight Overdraft Capacity section (II) of this Guide.
For more information on fully collateralized cap breach waivers, refer to part B of the Daylight Overdraft
Monitoring and Management section (IV) of this Guide.

Collateral 25
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purchases. 53 Institutions will need to establish a connection for the data transmission, comply
with deadlines for file submission, and conform to file formatting requirements. CMS will price
and apply any necessary margin adjustments to these securities net of customer funding amounts
to arrive at a value for in-transit collateral for each minute of the day.
Institutions interested in pledging in-transit collateral for PSR purposes should contact
their local Reserve Bank staff for detailed information and technical specifications.
D. Withdrawing Collateral
An institution may withdrawal collateral pledged to the Federal Reserve if that collateral
is not considered encumbered by the Reserve Bank. Reserve Banks consider collateral that is
securing an outstanding extension of credit at the discount window or securing a PSR collateral
requirement to be encumbered. Reserve Banks do not consider collateral pledged to support a
max cap to be encumbered, and is available for withdrawal at the institution’s discretion. 54 The
procedure to withdraw collateral depends on the collateral’s pledging arrangement. 55
1. Fedwire Securities Service (FSS)
Institutions may request a release of FSS collateral online using Fedline, or off-line by
telephoning the Wholesale Operations staff. Once the request is submitted in FSS, the securities
will be released if the collateral is unencumbered. The Reserve Bank and the institution will
receive notification that the security has been released, and the institution will receive the
associated reduction of collateral value in its FR account. If the collateral is encumbered, the
Reserve Bank will reject the withdrawal request and FSS will not release the security.
2. Depository Trust Company (DTC)
In order to withdraw DTC collateral, an institution (or custodian) initiates an instruction
to move an asset out of the Reserve Bank’s pledge account in DTC. If the collateral is
unencumbered, the securities will be released. If the security is encumbered, the Reserve Bank
will reject the withdrawal request, DTC will not release the security, and DTC will send a
message back to the institution or its custodian.
3. Custodians, BIC Arrangements, and Reserve Bank Custody
If an institution with collateral pledged through a third-party custodian, pledged through a
BIC arrangement, or in the custody of its Reserve Bank would like to withdraw its collateral, it
53
54

Pledging institutions must filter out from the report those Fedwire securities that are not discount window eligible.
Institutions with approved max caps may, at any time, pledge collateral to use the additional capacity in full or in
part. Pledging less collateral than the collateralized capacity will effectively reduce an institution’s available
daylight overdraft capacity.
55
For more information on pledging arrangements refer to the Federal Reserve Collateral Guidelines, available at
http://www.frbdiscountwindow.org/frcollguidelines.pdf.

Collateral 26
_________________________________________________________________________
must submit a written request to its Reserve Bank. The Reserve Bank will determine if the
collateral is encumbered. If the collateral is unencumbered, the Reserve Bank will withdraw the
collateral from CMS and inform the institution that its collateral has been released.
4. Foreign Depositories
Institutions that would like to withdraw Clearstream collateral must submit their requests
through Clearstream. For same-day release, the institution must contact Clearstream prior to
12:00 p.m., and Clearstream will contact the Reserve Bank once per day to request authorization
for the release. 56 The Reserve Bank will review the request to determine if the collateral is
unencumbered. If the collateral is unencumbered, the Reserve Bank will send an approval
message to Clearstream to release it.
Institutions that would like to withdraw Euroclear collateral must submit their request to
the Reserve Bank. The Reserve Bank will review the request to determine if the collateral is
unencumbered. If the collateral is unencumbered, the Reserve Bank will send an approval
message to Euroclear to release it.
E. Collateralized Daylight Overdrafts
1. Eligibility for zero-priced collateralized daylight overdrafts
Institutions with regular access to the discount window receive a zero fee for the
collateralized portion of their overdrafts, and are assessed a fee of 50 basis points (annual rate)
for the uncollateralized portion of their overdrafts. For more information on how the Federal
Reserve calculates daylight overdraft fees for such institutions, refer to part A of the Daylight
Overdraft Fees section (V) of this Guide.
Institutions that are not eligible for regular access to the discount window, such as Edge
Act and agreement corporations, bankers’ banks that are not subject to reserve requirements,
limited-purpose trust companies, GSEs, and certain international organizations, are not eligible
for intraday credit and will be assessed a penalty rate of 150 basis points (annual rate) for any
collateralized or uncollateralized daylight overdrafts. For more information on how the Federal
Reserve calculates daylight overdraft fees for such institutions, refer to part C of the Daylight
Overdraft Fees section (V) of this Guide.
An institution with collateral pledged to support an approved max cap receives a zero fee
for any daylight overdraft covered by the pledged collateral. Additional collateral pledged over
the amount needed to support the max cap will offset daylight overdraft fees but will not increase
the total max cap amount. For more information on max caps, including examples of how
maximum daylight overdraft capacity is calculated, refer to part C of the Daylight Overdraft
Capacity section (II) of this Guide.
56

Withdrawal requests must be quoted in US dollars.

Collateral 27
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2. Collateral available for daylight overdraft purposes
An institution’s collateral available for daylight overdraft purposes is calculated by
subtracting the value of all outstanding loan advances from the value of the collateral in the
institution’s Federal Reserve account. Collateral securing an extension of credit from the
discount window may not be simultaneously applied for PSR pricing purposes. Collateral
pledged towards a max cap or as a collateral requirement from the Reserve Bank is included in
an eligible institution’s collateral available 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
loan. Institutions will be able to monitor the value of their collateral available for daylight
overdraft purposes in near-real-time, as discussed in detail in part G (Collateral Monitoring) of
this section.
The Federal Reserve determines the extent to which a daylight overdraft is collateralized
by comparing an institution’s end-of-minute daylight overdraft balance to the value of collateral
available for daylight overdraft purposes at that minute. If the value of an institution’s collateral
available for daylight overdraft purposes meets or exceeds its daylight overdraft for a given
minute, then that minute of overdraft is considered fully collateralized and will receive a zero
price. If the daylight overdraft balance exceeds the collateral available for daylight overdraft
purposes, the portion of the daylight overdraft that is uncollateralized is included in the
calculation of the institution’s fees. For more information on how the Federal Reserve calculates
daylight overdraft fees, refer to the Daylight Overdraft Fees section (V) of this Guide.
F. Reserve Bank PSR Collateral Requirements
Under the PSR policy, a Reserve Bank may require an institution to pledge collateral in
certain circumstances. A Reserve Bank may impose a PSR collateral requirement if an
institution presents heightened risk to the Reserve Bank or incurs an impermissible daylight
overdraft. Institutions that are eligible for regular access to the discount window and with
collateral pledged towards a PSR collateral requirement will have the value of that collateral
applied towards pricing daylight overdrafts incurred by the institution. 57 PSR collateral
requirements do not contribute to supporting approved max caps and may not be used to
simultaneously secure a discount window loan.
Generally, institutions that are not eligible for regular access to the discount window, and
therefore do not have access to intraday credit, are required to pledge collateral after they have
incurred an impermissible daylight overdraft. Edge Act and agreement corporations, bankers'
57

The value of the collateral pledged towards the collateral requirement will be included in the value of an
institution’s collateral available for daylight overdraft purposes that is used to calculate fees for using intraday
credit. Additionally, at the Reserve Bank’s discretion, institutions with de minimis, self-assessed, or max caps may
incur up to two cap breaches in two consecutive reserve maintenance periods without violating the PSR policy.
Institutions must fully collateralize these cap breaches in order to be eligible for this waiver. For more information
on the fully collateralized cap breach waiver, see the Daylight Overdraft Monitoring and Management section (IV)
of this Guide.

Collateral 28
_________________________________________________________________________
banks that do not hold reserves, limited-purpose trust companies, GSEs, and international
organizations are not permitted to incur daylight overdrafts. 58 If such an entity incurs a daylight
overdraft, the Reserve Bank may require the institution to pledge collateral at least equal to the
highest total overdraft incurred by the institution over the past six months. After the institution
pledges collateral, ex post, to cover unauthorized overdrafts, subsequent overdrafts continue to
be prohibited as the pledge of collateral does not authorize them to incur daylight overdrafts.
Because these accountholders are not eligible for routine discount window access, they are
assessed a penalty fee on daylight overdrafts (even if collateralized), and they are not eligible for
fully collateralized cap breach waivers. 59
Industrial Loan Companies (ILCs) subject to the Bank Holding Company Act may incur
overdrafts on behalf of affiliates that are primary U.S. government security dealers. 60 ILCs must
fully collateralize all overdrafts they incur on behalf of affiliates that are primary U.S.
government security dealers. ILCs will not be assessed a fee on collateralized daylight
overdrafts; however, they are not eligible for fully collateralized cap breach waivers. 61
G. Collateral Monitoring
CMS serves as the system of record and valuation for all collateral pledged to the
Reserve Banks. Institutions may pledge and withdraw collateral and may receive or repay
discount window loans, which affect the amount of unencumbered collateral available for
daylight overdraft purposes. CMS updates collateral balances in near-real-time throughout the
day and sends this information to Account Management Information (AMI) and to the Account
Balance Monitoring System (ABMS), which are Federal Reserve applications that serve as
information sources and as balance monitoring and management tools for institutions. 62
1. Intraday monitoring
The AMI application provides institutions with near-real-time collateral holdings
information. Institutions may view and download aggregate and CUSIP-level collateral
information on an intraday basis. Institutions may view and download their intraday increases
(including deposits and revaluations) and decreases (including withdrawals and revaluations) to
58

For more information on Edge Act and agreement corporations, bankers' banks that do not hold reserves, limitedpurpose trust companies, GSEs, and international organizations, see the Special Situations section (VI) of this
Guide.
59
For more information on fully collateralized cap breach waivers, refer to part B of the Daylight Overdraft
Monitoring
and Management section (IV) of this Guide.
60
For more information on ILCs, see part B of the Special Situations section (VI) of this Guide.
61
For more information on fully collateralized cap breach waivers, refer to part B of the Daylight Overdraft
Monitoring
and Management section (IV) of this Guide.
62
AMI is a web-based application that provides institutions with real-time access to their intraday account and
collateral balances, detailed transaction information, reporting, and inquiry capabilities. For more information, see
http://www.frbservices.org/serviceofferings/account/ami.html. ABMS receives updated collateral information,
including an institution’s value of collateral available for daylight overdraft purposes, from CMS on a near-real-time
basis. ABMS will use the collateral available for daylight overdraft purposes to calculate the institution’s
collateralized and uncollateralized daylight overdraft balances, which will also be updated on a near-real-time basis.
Institutions can obtain information on ABMS and AMI in the Account Management Guide at
http://www.frbservices.org/files/regulations/pdf/amg.pdf.

Collateral 29
_________________________________________________________________________
their collateral positions rolled up by asset type (securities or loans). Institutions are also able to
view and download their collateral activity chronologically, from the beginning of the day to the
close of business.
Institutions may view their value of collateral available for daylight overdraft purposes,
which is the value of their Federal Reserve collateral less outstanding discount window
advances, during the day through AMI or ABMS. 63 Because the collateral available for daylight
overdraft purposes is used in the pricing calculation for daylight overdrafts, it is displayed in
AMI with the institution’s balance information, and institutions may view in near-real-time their
collateralized and uncollateralized daylight overdraft balance. Institutions that access balance
information through ABMS may receive their collateral available for daylight overdraft purposes
through the same means. Further discussion on balance information is available in section IV
(DLOD Monitoring and Management) of this Guide.
2. Ex post monitoring
In addition to monitoring their collateral balance intraday, institutions may also view
information about their collateral holdings and transactions ex post. CMS creates a statement of
collateral holdings at the CUSIP level and a report summarizing an institution’s collateral
transactions grouped by type, such as deposits, withdrawals, and revaluations, which are
available to institutions in AMI. Because collateral-related activities occur throughout the day
and past the close of business, CMS creates two sets of collateral reports each day. After
approximately 5:30 p.m. ET, institutions may access a preliminary version of their holdings
statement and transaction report showing the institution’s holdings and activity as of
approximately 5:30 p.m. ET that day. When all collateral activities have completed for the day,
which is generally well after the close of business, institutions will have access to a final version
of this report. The final version of the institution’s holdings statement and transaction report
replaces the preliminary versions in AMI and is available to institutions the next morning. In
addition, institutions have access to previous days’ final reports, which are also available through
AMI.
In addition to the reports available through AMI, at the end of each business day CMS
generates a report for each institution that has elected to receive a statement of their collateral
holdings via e-mail. 64 Institutions can determine the frequency with which they receive this
report, such as daily, weekly, or monthly. The report lists an institution’s collateral holdings at
the CUSIP level as of the previous business day.

63
64

AMI and ABMS do not provide institutions with information on extensions of credit.
Institutions may elect to receive holdings statements via e-mail from CMS if they do not have access to AMI.

Daylight Overdraft Monitoring and Management 30
_________________________________________________________________________
IV. Daylight Overdraft Monitoring and Management
The information provided in this section is intended to assist institutions in managing
their Federal Reserve account balances. All institutions that maintain Federal Reserve accounts
and use Federal Reserve services are expected to monitor their account balances on an intraday
basis. Institutions should be aware of payments they are making from their accounts each day
and how those payments are funded. Institutions are expected to use their own systems and
procedures, as well as the Federal Reserve’s systems, described below, to monitor their Federal
Reserve account balance and payment activity.
A. Daylight Overdraft Measurement
The Reserve Banks use an automated application to monitor institutions’
compliance with the PSR policy and calculate daylight overdraft charges. A daylight overdraft
occurs when an institution's Federal Reserve account is in a negative position at any time during
the Fedwire operating day (9:00 p.m. previous day to 6:30 p.m. ET). The Reserve Banks use an
ex post system of daylight overdraft posting rules to measure daylight overdrafts in institutions’
Federal Reserve accounts. 65
At the end of each Fedwire operating day, the Reserve Bank automated daylight overdraft
monitoring and pricing application retrieves information on an institution’s end-of-minute
account balances, calculated according to the daylight overdraft posting rules. 66 An institution’s
account balance is measured at the end of each minute based on the institution’s opening balance
and all payment transactions posted to the institution’s account up until that time. The
application also uses information on end-of-minute balances of collateral available for daylight
overdraft purposes to determine the extent to which an institution’s daylight overdraft is
uncollateralized. 67 The daylight overdraft, collateral, and capital information is used to measure
collateralized and uncollateralized daylight overdrafts, monitor net debit cap compliance, and
calculate fees.
The daylight overdraft measurement and pricing period coincides with the standard
Fedwire operating day. 68 Positive end-of-minute balances do not offset negative balances at
other times during the day for purposes of determining compliance with net debit caps or for
calculating daylight overdraft fees.

65

Under daylight overdraft posting rules, certain transactions, including Fedwire funds and security 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. Daylight
overdraft posting rules are available at http://www.federalreserve.gov/paymentsystems/psr_policy.htm.
66
The schedule of posting rules is located in part II of the PSR policy, available at
http://www.federalreserve.gov/paymentsystems/psr_policy.htm#daylightdef.
67
For institutions pledging in-transit collateral, this collateral information also contains in-transit collateral.
68
In cases of extensions of Fedwire operating hours, all transactions that occur after the standard Fedwire closing
time are posted at 6:30 p.m. for daylight overdraft purposes.

Daylight Overdraft Monitoring and Management 31
_________________________________________________________________________
B. Monitoring Compliance with the PSR Policy
Reserve Banks generally monitor institutions’ compliance with the PSR policy over each
two-week reserve maintenance period. At the end of each two-week reserve maintenance period,
the Reserve Bank automated daylight overdraft monitoring and pricing application generates
several reports that provide both Reserve Banks and institutions with information for monitoring
daylight overdrafts, including the largest (or peak) daylight overdraft for each day during the
period and daylight overdrafts in excess of an institution’s approved daylight overdraft capacity
(cap breach). 69 An institution incurs a cap breach if, at any time during the Fedwire operating
day, it incurs a daylight overdraft in excess of its cap. 70
The Federal Reserve considers all cap breaches to be violations of the PSR policy except
in the following circumstances. First, the policy allows institutions in the exempt-from-filing
cap category to incur up to two cap breaches in two consecutive reserve maintenance periods.
Second, certain cap breaches incurred by institutions in the administrative counseling flexibility
program are not considered policy violations. 71 Third, Reserve Banks may grant fully
collateralized cap breach waivers (FCCB waivers) to institutions in certain circumstances.
Under the policy, institutions with de minimis, self-assessed, and max cap net debit caps may
fully collateralize up to two cap breaches in two consecutive reserve maintenance periods (four
weeks) without violating the policy. 72 In addition, a Reserve Bank has discretion to waive a
violation in limited circumstances, such as an operational problem at a Reserve Bank.
For daylight overdraft purposes, Edge Act and agreement corporations and mergertransition accounts are monitored on a consolidated basis; that is, a single account balance is
derived by adding together the end-of-minute balances of each account. If these institutions have
an account in more than one Federal Reserve District, the ARB coordinates the Federal
Reserve’s daylight overdraft monitoring activities for the consolidated accounts.

69

Institutions may also access current information on their account and collateral balances and daylight overdraft
position using AMI. Part C of this section, Real-Time Monitoring, contains additional information on AMI.
70
For an institution with a self-assessed cap that has been approved for maximum daylight overdraft capacity, the
single-day
limit is equal to an institution’s net debit cap plus the amount of applicable collateralized capacity.
71
The administrative counseling flexibility program helps relatively small institutions that, by the nature of their
business, will continue to exceed a net debit cap even after the appropriate adjustments have been made. Under this
program, the Reserve Banks will work with the affected depository institutions to identify alternatives that would
avoid or reduce daylight overdrafts caused by transactions other than Fedwire funds transfers, National Settlement
Service transactions, or ACH credit originations. The Reserve Banks generally will not subject these institutions to
escalated levels of counseling, require collateral, or assign a zero cap. Institutions in the exempt-from-filing net
debit cap category are not eligible for the administrative counseling flexibility program.
72
Institutions that are exempt from filing are excluded from this additional flexibility because they already are
allowed to exceed their cap limit twice in two consecutive reserve maintenance periods. Zero cap institutions are
not eligible for the fully collateralized cap breach waiver.
U.S. branches and agencies of FBOs are monitored at their cap level in real time. If an institution’s account is
monitored in real time, any outgoing Fedwire funds transfer or National Settlement Service transaction that exceeds
available funds is rejected. In addition, institutions monitored in real time are required to prefund ACH credit
originations. If the total amount of all of the ACH credit item originations exceeds the branch or agency’s account
balance, none of the items will be processed. If a branch or agency of an FBO exceeds its cap periodically due to
payment transactions that are not subject to the real-time monitor, the Reserve Bank may waive counseling up to
twice in two consecutive reserve maintenance periods if the daylight overdrafts are fully collateralized.

Daylight Overdraft Monitoring and Management 32
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1. Consequences of policy violations
A policy violation may initiate a series of Reserve Bank actions aimed at deterring an
institution’s excessive use of Federal Reserve intraday credit. These actions depend on the
institution’s history of daylight overdrafts and financial condition. Initial actions taken by the
Reserve Bank may include an assessment of the causes of the overdrafts, a counseling letter to
the institution, and a review of the institution’s account-management practices. In addition, the
Reserve Bank may require an institution to submit documentation specifying actions it will take
to address the overdraft problems. If policy violations continue to occur, the Reserve Bank may
take additional actions. For example, if a financially healthy institution in the zero, exemptfrom-filing, or de minimis cap category continues to breach its cap, the Reserve Bank may
strongly recommend that the institution file a cap resolution or perform a self-assessment to
obtain a higher net debit cap.
In situations in which an institution continues to violate the PSR policy, and counseling
and other Reserve Bank actions have been ineffective, the Reserve Bank may assign the
institution a zero cap. In addition, the Reserve Bank may impose other account controls that it
deems prudent, such as requiring the institution to pledge collateral, imposing account balance
requirements; rejecting Fedwire funds transfers or NSS transactions that would cause or increase
an institution’s daylight overdraft; or requiring the institution to prefund ACH transactions.
Reserve Banks also keep institutions’ primary regulators apprised of any recurring overdraft
problems.
C. Real-time Monitoring and the Account Balance Monitoring System (ABMS)
The Reserve Banks use ABMS to monitor in real time the payment activity of
institutions that may expose the Federal Reserve and other payment system participants to risk of
loss. ABMS serves as both an information source and an account monitoring and management
tool. It allows institutions to obtain intraday balance and collateral information for purposes of
managing their use of intraday credit, avoiding overnight overdrafts, and monitoring in real time
their collateralized and uncollateralized daylight overdraft balance. All institutions that have an
electronic connection to the Federal Reserve’s Fedwire Funds Transfer Service are able to access
their intraday Federal Reserve account position in ABMS or in AMI. While ABMS is not a
substitute for an institution’s own internal tracking and monitoring systems, it does provide realtime account information based on Fedwire funds and securities transfers and NSS transactions.
Additionally, ABMS captures debits and credits resulting from other payment activity as those

Daylight Overdraft Monitoring and Management 33
_________________________________________________________________________
transactions are processed in the Reserve Banks’ accounting system. 73 ABMS also provides
authorized Federal Reserve Bank personnel with a mechanism to monitor and control account
activity for selected institutions.
ABMS has the capability to reject or intercept certain transactions affecting an
institution’s account. This capability is called “real-time monitoring.” The Reserve Banks use
real-time monitoring to prevent selected institutions from effecting certain transactions if their
accounts lack sufficient funds to cover the payments. Institutions are generally notified before a
Reserve Bank begins monitoring their accounts in real time.
If an institution’s account is monitored in the “reject” mode in ABMS, any outgoing
Fedwire funds transfer or NSS transaction that exceeds its available funds is rejected back to the
sending institution. The institution can initiate the transaction again once sufficient funds
become available in its Federal Reserve account. 74 If an institution’s Federal Reserve account is
monitored in the “intercept” mode, sometimes referred to as the “pend” mode, outgoing funds
transfers that would cause an overdraft in excess of the threshold will not be processed but will
be held for review by the Reserve Bank. These intercepted transactions will be rejected or
released by the Reserve Bank once funds are available in the institution’s account. Reserve
Banks will normally be in direct contact with an institution if any of its funds transfers are
intercepted.
ABMS calculates balances three ways so that institutions and Reserve Bank staff can
take into account the effect of the daylight overdraft posting rules on an institution’s payment
activity. The daylight overdraft (DLOD) balance in ABMS reflects the balance in the account
according to the transaction posting rules described in the PSR policy. 75

73

ABMS receives transaction information from the Fedwire Funds Service, the Fedwire Securities Service, and the
National Settlement Service in real time; information from the Federal Reserve Integrated Accounting System
(IAS), such as cash and check transactions at 5-minute intervals; and information on prefunded ACH credit
originations every 15 minutes. ABMS receives updated collateral information, including an institution’s value of
collateral available for daylight overdraft purposes, from the Federal Reserve’s Collateral Management System on a
near-real-time basis. ABMS will use the collateral available for daylight overdraft purposes to calculate the
institution’s collateralized and uncollateralized daylight overdraft balances, which will also be updated on a nearreal-time basis. For more information on collateral available for daylight overdraft purposes, see the Collateral
section (III) of this Guide.
74
The institution will be required to prefund its ACH credit originations, as the total amount of all ACH credit item
originations will be deducted from its account when the Reserve Bank processes the items. If the total amount of all
ACH credit item originations exceeds an institution’s account balance, none of the items will be processed. Further
information on ACH prefunding is available in Operating Circular 4:
http://www.frbservices.org/regulations/operating_circulars.html.
75
The schedule of posting rules is located in part II of the PSR policy, available at
http://www.federalreserve.gov/paymentsystems/psr_policy.htm#daylightdef.
There may be some instances when the DLOD balance in ABMS may be slightly different from the DLOD
balance recorded by the Reserve Bank automated daylight overdraft monitoring and pricing application because this
application takes an end-of-minute “snapshot,” while ABMS continuously updates balances as transactions are
processed. In addition, the DLOD balance in ABMS may be different from the DLOD balance calculated for
daylight overdraft monitoring and pricing purposes if transactions are processed late.

Daylight Overdraft Monitoring and Management 34
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A second balance calculated by ABMS, the account (ACCT) balance, reflects the sum of
all transactions posted to ABMS regardless of the daylight overdraft posting rules.
A third balance, the available funds (AVL FNDS) balance, shows funds available to an
institution that include its daylight overdraft capacity. The AVL FNDS balance is calculated by
using either the DLOD balance or the ACCT balance and then adding the totals for the
institution’s net debit cap, any applicable collateralized capacity, and any other amounts memo
posted to the institution’s account. 76 Reserve Banks may choose to monitor institutions based on
either the ACCT balance or DLOD balance, depending on the circumstances.
In addition, institutions can monitor their collateral balances and collateralized and
uncollateralized daylight overdraft positions in near-real-time in ABMS or AMI. The collateral
available for daylight overdraft purposes field shows the value of Federal Reserve collateral that
an institution has pledged to its Reserve Bank that is not securing an extension of credit
(including a discount window loan). 77 This value is compared with an institution’s daylight
overdraft balance at the end of each minute in near-real-time to determine whether the
institution’s overdraft is collateralized. If the institution’s value of collateral available for
daylight overdraft purposes meets or exceeds the institution’s daylight overdraft for a given
minute, that minute of overdraft is considered fully collateralized and is reflected in the
institution’s collateralized daylight overdraft value. If the institution’s daylight overdraft balance
exceeds the institution’s value of collateral available for daylight overdraft purposes, the
difference between these values is reflected in the institution’s uncollateralized daylight
overdraft field, and this value would be used in the calculation of the institution’s fees. 78 For
more information on collateral under the PSR policy, see section III (Collateral) of this
document.
D. Ex Post Monitoring
At the end of each reserve maintenance period during which an institution has incurred a
daylight overdraft, the Reserve Bank automated daylight overdraft monitoring and pricing
application generates reports that reflect an institution’s daylight overdraft activity for the reserve
maintenance period. These reports, which are available to institutions through AMI, provide
institutions with useful information for monitoring daylight overdrafts, such as overdrafts in
excess of the institution’s net debit cap, and end-of-minute balances for a particular day.
Reserve Banks may also provide institutions with reports in the process of counseling institutions
that have incurred daylight overdrafts in excess of their daylight overdraft capacity. For more
information on daylight overdraft reports, see the Federal Reserve’s Account Management Guide
available at http://www.frbservices.org/files/regulations/pdf/amg.pdf.
76

Reserve Banks use the memo post function of ABMS to post transactions to ABMS that may not be passed to the
Federal Reserve Bank’s accounting system until later in the day (for example, cash shipments).
Collateral available for daylight overdraft purposes does not necessarily reflect the amount of collateral available
for
new lending or available for withdrawal.
78
For more information on how the Federal Reserve calculates daylight overdraft fees, see the Daylight Overdraft
Fees section (V) of this guide.
77

Daylight Overdraft Fees 35
_________________________________________________________________________

V. Daylight Overdraft Fees
This section describes how daylight overdraft charges are calculated and assessed for
institutions that incur uncollateralized daylight overdrafts and have regular access to the discount
window. In addition, this section identifies types of institutions that are not eligible for daylight
overdrafts and are charged a penalty fee for any use of unauthorized intraday credit.
A. Calculation of Daylight Overdraft Charges
Under the PSR policy, institutions with regular access to the discount window are only
charged for uncollateralized daylight overdrafts. In order to determine whether any portion of an
institution’s overdraft was uncollateralized, the Federal Reserve, through its automated daylight
overdraft monitoring application, maintains minute-by-minute information on account holders’
daylight overdraft and collateral balances.
At the end of each Fedwire operating day, the daylight overdraft monitoring application
retrieves information on an institution’s end-of-minute account balances, calculated according to
the daylight overdraft posting rules, and its collateral available for daylight overdraft purposes
(that is, institution’s end-of-minute value of Federal Reserve collateral, less extensions of credit
from the discount window). 79 These values are used to determine the extent to which an
institution’s daylight overdraft is uncollateralized for pricing calculations. The value of the
average uncollateralized daylight overdraft is multiplied by the fee rate to generate the daily
overdraft charge. At the end of each reserve maintenance period, the daily charges for the period
are summed, the fee waiver for eligible institutions is applied, and a report of the reserve
maintenance period charges is generated. Institutions have access to charge information on a
daily basis and to final charges at the end of the maintenance period.
B. Example of Daylight Overdraft Charge Calculation
Figure V-1 below provides an example of how the Reserve Banks use ex post end-ofminute balance and collateral information to calculate an institution’s charges. In the example,
the institution’s daylight overdraft balance and collateral levels change intraday. For simplicity,
the illustration shows only a few minutes of the Fedwire operating day and assumes that the
institution has similar activity each day of the two-week reserve maintenance period.

79

The schedule of posting rules is located in part II of the PSR policy, available at
http://www.federalreserve.gov/paymentsystems/psr_policy.htm#daylightdef.
Institutions with certain level of access to Federal Reserve services are able to access and view their daylight
overdraft balance in real time, either through ABMS or AMI. See www.frbservices.org for further information.
Institutions can also access information regarding their collateral available for daylight overdraft purposes through
ABMS or AMI throughout the day. For more information on monitoring, refer to the Daylight Overdraft
Monitoring and Management section (IV) of this Guide. For more information on collateral, see the Collateral
section (III) of this Guide.

Daylight Overdraft Fees 36
_________________________________________________________________________
1. Calculation of end-of-minute uncollateralized daylight overdraft
The daylight overdraft monitoring application calculates an institution’s end-of-minute
uncollateralized daylight overdraft by comparing the institution’s end-of-minute daylight
overdraft with the institution’s value of collateral available for daylight overdraft purposes. Once
the value of the uncollateralized overdraft for each minute of the Fedwire operating day (1,291
minutes) has been calculated, the application sums these values. 80 All end-of-minute
uncollateralized overdrafts incurred during the Fedwire day, including those not exceeding an
institution’s net debit cap, are included in the calculation. Positive account balances on a given
day are set to zero and do not offset any overdrafts incurred that day in computing the average
daylight overdraft amount.
2. Calculation of daily daylight overdraft charge
The daylight overdraft monitoring application calculates the institution’s average daily
uncollateralized overdraft by dividing the sum of the institution’s end-of-minute uncollateralized
negative Federal Reserve account balances by the total number of minutes in the scheduled
Fedwire operating day. 81
Average daily fees are calculated by multiplying the average daily uncollateralized
overdraft by the effective daily rate. The effective daily rate is calculated using an annual rate of
50 basis points, quoted on the basis of a 24-hour day and a 360-day year. 82 The annual rate is
converted to an effective annual rate for the standard Fedwire operating day by multiplying it by
the fraction of the day that Fedwire is scheduled to be open, currently 21.5 hours out of 24.
Thus, the current effective annual rate charged for overdrafts is 44.79 basis points (50 basis
points x 21.5/24 hours). The effective annual rate is converted to an effective daily rate by
multiplying it by 1/360. 83
3. Calculation of reserve maintenance period charge and application of fee waiver
At the end of each reserve maintenance period, which is generally 10 business days, the
daylight overdraft monitoring application sums the daily charges for each institution. Eligible
institutions receive a fee waiver of up to $150 per reserve maintenance period. Institutions that
incur two-week charges under $150 are not assessed any fees, and institutions that incur two-

80
81

Figure V-1 shows only a few minutes of the Fedwire operating day (2:00 p.m. ET to 2:05 p.m. ET) for simplicity.
The standard operating day for the Fedwire funds transfer system currently extends from 9:00:00 p.m.ET the
preceding calendar day to 6:30:59 p.m. ET, a total of 1,291 minutes. The occasional extensions of Fedwire beyond
the standard 21.5-hour day do not affect the number of minutes used in computing the average overdraft.
82
Institutions with regular access to the discount window are charged 50 basis points (annual rate) for
uncollateralized overdrafts. Institutions that do not have regular access to the discount window, such as Edge Act
and agreement corporations, bankers’ banks that have not waived their exemption from reserve requirements,
limited-purpose trust companies, GSEs, are subject to the penalty fee of 150 basis points (annual rate).
83
The effective daily daylight-overdraft rate is truncated to .0000124.

Daylight Overdraft Fees 37
_________________________________________________________________________
week charges over $150 have their gross fees reduced by $150. 84 In the example, the
institution’s charges for this reserve maintenance period are $22.90. The finalized charges are
passed to IAS for settlement two weeks after the reserve maintenance period in which they were
incurred.
Figure V-1: Example of Daylight Overdraft Charge Calculation
Calculate an institution’s end-of-minute uncollateralized daylight overdraft
Row

Time

1

2:00 PM

Daylight overdraft
balance
(in millions)
$100

2

2:01 PM

$0

$50

$0

3

2:02 PM

($800)

$100

$700

4

2:03 PM

($100)

$100

$0

5

2:04 PM

($600)

$100

$500

6

2:05 PM

($600)

$0

$600

7

Collateral available for
daylight overdraft purposes
(in millions)
$50

Uncollateralized
daylight overdraft
(in millions)
$0

Sum of end-of-minute uncollateralized daylight overdraft

$1,800

Calculate an institution’s daily charge
A. Average daily uncollateralized daylight overdraft
Sum of end-of-minute uncollateralized overdrafts for one day = $1,800,000,000 = $1,394,268
official Fedwire day = 21.5 hours (or 1,291 minutes)
1,291
B. Daily daylight overdraft charge
average daily uncollateralized overdraft =
multiplied by effective daily rate 85 = .0050 x (21.5/24) x (1/360) =

84

$1,394,268
x .0000124
$17.29

The waiver shall not result in refunds or credits to an institution and cannot be carried to another reservemaintenance period. The fee waiver is not available to institutions that do not have regular access to the discount
window, such as Edge Act and agreement corporations, bankers’ banks that have not waived their exemption from
reserve requirements, limited-purpose trust companies, and GSEs.
85
The effective daily daylight-overdraft rate is truncated to .0000124.

Daylight Overdraft Fees 38
_________________________________________________________________________

Calculate an institution’s reserve maintenance period charge and apply the fee waiver
A. Gross reserve maintenance period overdraft charge
Sum of daily overdraft charges = $17.29 x 10 days per reserve maintenance period 86
=
$172.90
B. Subtract the waiver from the gross reserve maintenance period overdraft charge 87
less

$150 fee waiver

─ $150.00
$22.90

C. Billing and Adjustments
1. Assessment of charges
At the end of each reserve maintenance period, the Reserve Bank provides a report of
charges to each institution that was assessed fees in that period. 88 Eligible institutions whose
reserve maintenance period charges were under $150 will receive a report of their use of
uncollateralized daylight overdrafts, but their assessed fees will be waived. The Federal Reserve
makes an assessment of final charges to the institution’s Federal Reserve account at the end of
the reserve maintenance period following the reserve maintenance period in which charges are
assessed.
The Federal Reserve may make adjustments to daylight overdraft charges in limited
circumstances, such as errors, incorrect accounting entries, or cases of extended computer or
communications operational difficulties at a Reserve Bank. Reserve Banks, however, will not
make adjustments to compensate for institutions’ internal problems.

86

The example assumes that the institution has had identical activity for each day of the reserve maintenance period;
the
daily charge is multiplied by ten to calculate the reserve maintenance period charge.
87
The example assumes that the institution has regular access to the discount window and is not an Edge Act and
agreement corporation, bankers’ bank that has not waived its exemption from reserve requirements, limited-purpose
trust
company, GSE, or international organization.
88
Institutions that incur overdrafts that are sufficiently large to result in daylight overdraft fees will receive an
Advice of Daylight Overdraft Charges Report at the close of the reserve maintenance period in which the overdrafts
occurred. The report shows the average uncollateralized overdraft for each day on which the fees occurred. An
example of the report can be viewed in the Account Management Guide at
http://www.frbservices.org/files/regulations/pdf/amg.pdf.

Daylight Overdraft Fees 39
_________________________________________________________________________
D. Institutions Subject to Daylight Overdraft Penalty Fees
Under the PSR policy, institutions that have Federal Reserve accounts but lack regular
access to the discount window are not eligible for a positive daylight overdraft cap and may not
incur daylight overdrafts. These institutions include Edge Act and agreement corporations,
bankers’ banks that have not waived their exemption from reserve requirements, limited-purpose
trust companies, government-sponsored enterprises, and certain international organizations.
Such institutions are subject to the penalty fee, which is assessed on all daylights incurred,
collateralized or uncollateralized.
The penalty fee is intended to provide a strong incentive for these institutions to avoid
incurring any daylight overdrafts in their Federal Reserve accounts. The annual penalty rate is
150 basis points, which is equal to the regular daylight overdraft fee of 50 basis points plus a
penalty of 100 basis points. The penalty fee is calculated and assessed in the same manner as the
daylight overdraft fee charged to institutions with discount window access. 89 Penalty fee-paying
institutions that incur overdrafts do not receive a zero fee for collateralized overdrafts or the fee
waiver and are not eligible for fully collateralized cap breach waivers. 90 These institutions are
subject to a minimum fee of $25 for any reserve maintenance period in which they incur a fee. 91

89

The daily penalty charge is equal to the effective daily penalty rate multiplied by the average total overdrafts
(uncollateralized and collateralized) for the day. The effective daily penalty rate is calculated by multiplying the
annual penalty rate by the portion of the day during which the Fedwire Funds normally operates (21.5 hours out of
24
hours), divided by 360 days.
90
For more information on fully collateralized cap breach waivers, refer to part B of the Daylight Overdraft
Monitoring and Management section (IV) of this Guide.
91
For more information regarding these types of accounts, see the Special Situations section (VI) of this Guide.

Special Situations 40
_________________________________________________________________________
VI. Special Situations
This section discusses the unique considerations associated with U.S. branches and
agencies of FBOs, and a number of entities that are not eligible for regular access to the discount
window, and therefore do not have access to intraday credit.
A. U.S. Branches and Agencies of Foreign Banking Organizations 92
In general, U.S. branches and agencies of FBOs are treated in the same manner as
domestic institutions under the Federal Reserve’s PSR policy. There are some unique
considerations, however, that affect how the policy applies to U.S. branches and agencies of
FBOs. These situations are discussed below and in the self-assessment procedures in section VII
of the Guide.
Net debit caps for the U.S. branches and agencies of FBOs are calculated generally in the
same manner as they are calculated for domestic institutions. Net debits caps are calculated by
multiplying an institution’s cap multiple by an institution’s capital measure. However, the
determination of the capital measure, known as the U.S. capital equivalency, depends on the
FBO’s strength of support assessment (SOSA) ranking and on whether the bank is a financial
holding company (FHC). 93
1. U.S. capital equivalency
For U.S. branches and agencies of FBOs, net debit caps on daylight overdrafts in Federal
Reserve accounts are calculated by applying the cap multiples for each cap category to the
FBO’s U.S. capital equivalency measure. The U.S. capital equivalency equals
•
•
•

92
93

35 percent of capital for FBOs that are financial holding companies (FHCs), or
25 percent of capital for FBOs that are not FHCs and are ranked a SOSA 1, or
10 percent of capital for FBOs that are not FHCs and are ranked a SOSA 2, or

A U.S. branch or agency is a branch or agency of a foreign banking organization located in the United States.
The SOSA ranking is composed of four factors, including the FBO’s financial condition and prospects, the system
of supervision in the FBO’s home country, the record of the home country’s government in support of the banking
system or other sources of support for the FBO; and transfer risk concerns. Transfer risk relates to the FBO’s ability
to access and transmit U.S. dollars, which is an essential factor in determining whether an FBO can support its U.S.
operations. The SOSA ranking is based on a scale of 1 through 3, with 1 representing the lowest level of
supervisory concern.
The Gramm-Leach-Bliley Act (Public Law 106-102, 113 Stat. 1338 (1999)) defines an FHC as a bank holding
company that meets certain eligibility requirements. In order for a bank holding company to become a financial
holding company and be eligible to engage in the new activities authorized under the Gramm-Leach-Bliley Act, all
depository institutions controlled by the bank holding company must be well capitalized and well managed. With
regard to an FBO that operates a branch or agency or owns or controls a commercial lending company in the United
States, the act requires the Board to apply comparable capital and management standards that give due regard to the
principle of national treatment and equality of competitive opportunity.

Special Situations 41
_________________________________________________________________________
•

5 percent of “net due to related depository institutions” for FBOs that are not
FHCs and are ranked a SOSA 3. 94 Most SOSA 3-ranked institutions do not
qualify for a positive net debit cap.

U.S. branches and agencies of FBOs that wish to establish a positive net debit cap
category are required to submit the Annual Daylight Overdraft Capital Report for U.S. Branches
and Agencies of Foreign Banks (FR 2225) to their ARB. 95 A net debit cap, or any extension of
intraday credit, is granted to an institution at the discretion of the Reserve Bank. In limited
circumstances, a Reserve Bank may grant a net debit cap or extend intraday credit to a
financially healthy SOSA 3-ranked FBO; the Reserve Bank may require such credit to be fully
collateralized, given the heightened supervisory concerns with SOSA 3-ranked FBOs. An
institution should contact its Reserve Bank for guidance in these situations.
As in the case of U.S. institutions, the ARB must have the ability to assess regularly the
financial condition of an FBO in order to grant its U.S. branch or agency a daylight overdraft cap
other than zero. The ARB may require information regarding Tier I and total risk-based capital
ratios for the consolidated FBO. 96 The ARB may require U.S. branches and agencies of FBOs
seeking a positive daylight overdraft cap (exempt, de minimis, or self-assessed cap categories) to
provide capital ratios at the time the cap is established and annually thereafter. Workpapers for
capital ratios should be maintained at a designated U.S. branch or agency and are subject to
review by the institution’s primary supervisor. The Federal Reserve regards capital information
provided to the ARB in connection with an institution’s daylight overdraft cap as confidential
and will share this information only with the primary regulator for the branch or agency and
home country supervisor of the FBO (5 U.S.C. § 552(b)). 97 Institutions are also expected to treat
their cap as confidential and should not disclose this information for marketing purposes. If an
institution believes that it must disclose its cap under securities law, the Federal Reserve does not
prohibit such disclosure.
An FBO that is an FHC or has a SOSA rating of 1 and has a U.S. branch or agency with a
self-assessed net debit cap may request from its Reserve Bank a streamlined procedure to obtain
a maximum daylight overdraft capacity (max cap) of up to 100 percent of the FBO’s worldwide
capital times the net debit cap multiple for the branch or agency. See section II.C. for the
streamlined procedure.
2. Allocation of caps
Each FBO family, consisting of all of the U.S. branches and agencies of a particular FBO,
has a single daylight overdraft cap. An FBO family that has offices in more than one District
94

This item is reported on the FBO family's quarterly Report of Assets and Liabilities of U.S. Branches and
Agencies
of Foreign Banks (Federal Financial Institution Examination Council report FFIEC 002).
95
A copy of the FR 2225 report and instructions is available at
www.federalreserve.gov/boarddocs/reportforms/default.cfm.
96
Descriptions of capital measures, by type of institution, and related regulatory reports can be found in appendix C.
97
For more information on the Freedom of Information Act, see
http://www.federalreserve.gov/generalinfo/foia/foiastat.cfm.

Special Situations 42
_________________________________________________________________________
may choose to allocate a portion of its net debit cap to branches or agencies in Districts other
than that of the ARB. Unless an FBO family instructs otherwise, the Federal Reserve will assign
the dollar value of the family’s daylight overdraft cap to the branch or agency located in the
Federal Reserve District of the ARB. Using a format similar to the sample letter in appendix B,
the FBO family may indicate to the ARB the dollar amount to be allocated to branches or
agencies in other Districts. The FBO family should update or confirm the allocation annually
with its ARB. Any amount that is not allocated to offices in other Districts will be assigned to
the branch or agency in the District of the ARB.
Each U.S. branch or agency of an FBO is monitored in real time and ex post at its cap
level. 98 Each branch or agency is also assessed daylight overdraft charges, unless the daylight
overdrafts are secured by the collateral held by the Reserve Bank of the respective branch or
agency. Each branch or agency is eligible for the $150 fee waiver. 99 Branches and agencies
with allocated caps must post collateral separately for each account that incurs daylight
overdrafts to be eligible for the FCCB waiver. 100
An FBO family with an approved max cap may allocate the portion of the max cap over
and above its net debit cap, referred to as the collateralized capacity. 101 Each branch or agency
that receives such allocation must provide collateral that is acceptable to its Reserve Bank in
both form and amount prior to accessing the allocated additional daylight overdraft capacity.

98

When an institution’s account is monitored in real time, certain transactions (outgoing Fedwire funds transfers or
National
Settlement Service transactions) are rejected if such transactions exceed the cap.
99
See
section
VI for further information on daylight overdraft fee calculation.
100
If an FBO family has a de minimis cap or self-assessed cap and allocates its capacity, all branches and agencies
with allocated capacity are eligible for the FCCB waivers, provided cap breaches are fully collateralized at the
Reserve Bank(s) where they are incurred.
101
Collateralized capacity is the additional daylight overdraft capacity available to an institution with an approved
max cap through the pledge of collateral. See section II for further information on max caps.

Special Situations 43
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B. Industrial Banks and Industrial Loan Companies Subject to the BHCA Exception
Industrial banks and industrial loan companies (ILCs) subject to the Bank Holding
Company Act (BHCA) may not incur daylight overdrafts on behalf of affiliates, except in three
circumstances. 102 First, the prohibition does not extend to overdrafts that result from inadvertent
computer or accounting errors beyond the control of the nonbank bank. Second, ILCs are
permitted to incur overdrafts on behalf of an affiliate that is a primary U.S. government security
dealer, provided such overdrafts are fully collateralized. Third, overdrafts incurred in connection
with an activity that is financial in nature are also permitted. 103 An ILC loses its exemption from
the definition of bank under the BHCA if it incurs prohibited overdrafts.
ILCs must comply with the PSR policy regarding net debit caps in the same manner as
other institutions and are subject to daylight overdraft fees, calculated using the same methods as
those applied to other institutions. In addition to the regular monitoring for these institutions, the
Federal Reserve monitors ILCs that are subject to BHCA exception using a separate formula
under Regulation Y to calculate intraday Federal Reserve account positions.
If an ILC incurs overdrafts that are prohibited, the Reserve Bank will request that the
institution provide detailed information about activity processed for affiliate accounts, so that it
can determine whether the overdraft was incurred on behalf of an affiliate. If the overdraft was
on behalf of an affiliate that is a primary U.S. government security dealer, the ILC is required to
demonstrate that the overdraft was fully collateralized. If the overdraft was on behalf of an
affiliate and was financial in nature, the ILC is required to demonstrate the purpose of the
overdraft as defined by section 4(k)(5) of the BHCA. ILCs that do not maintain accounts for
affiliates may file a letter with the Reserve Bank on an annual basis certifying that they do not
currently have affiliate accounts and that they will notify the Reserve Bank promptly should that
status change. (Appendix B provides a sample certification letter.)

102

In 1987, Congress enacted the Competitive Equality Banking Act (CEBA) to close the so-called nonbank bank
loophole that existed in the BHCA (Pub.L. No. 100-86, 101 Stat.552). CEBA expanded the definition of “bank” in
the BHCA to include any FDIC-insured bank (regardless of the activities it conducts) and any banking institution
that both offers transaction accounts and makes commercial loans (regardless of whether it is FDIC-insured).
References to an ILC include an industrial bank.
For this purpose, an affiliate is any company that controls the ILC, is controlled by it, or is under common control
with it.
103
Information concerning the definition of “financial in nature” can be found within the Federal Reserve’s
Regulation Y, located at http://www.federalreserve.gov/regulations/regref.htm#y.

Special Situations 44
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C. Institutions Subject to Daylight Overdraft Penalty Fees
Under the PSR policy, institutions that have Federal Reserve accounts but are not eligible
for regular access to the discount window are not eligible for a positive daylight overdraft cap.
These institutions should not incur any daylight overdrafts. If such an institution were to incur
an overdraft, however, the Reserve Bank would generally require it to pledge collateral sufficient
to cover the peak amount of the overdraft for a specified period. If an institution that is ineligible
to incur daylight overdrafts pledges collateral, or already has collateral pledged to its FR account,
its pledge of collateral does not authorize the institution to incur daylight overdrafts in the future.
In addition, this collateral will not be used in the calculation to offset fees, if such an institution
should incur an overdraft. 104
The institutions described below are subject to a penalty fee on any daylight overdrafts
incurred in their Federal Reserve accounts. The penalty fee is intended to provide a strong
incentive for these institutions to avoid incurring any daylight overdrafts in their Federal Reserve
accounts. The penalty fee is assessed at a rate equal to the regular daylight overdraft fee of 50
basis points, plus 100 basis points, for a total penalty fee of 150 basis points (annualized, 24-hour
rate). The penalty fee is calculated and assessed in the same manner as the daylight overdraft fee
charged other institutions, as described in section V, with the following exceptions: These
institutions are not eligible for the $150 fee waiver, and if the calculated charges in any twoweek reserve maintenance period are less than $25, a minimum fee of $25 will be charged.
1. Edge Act and agreement corporations 105
Edge Act and agreement corporations are not eligible for regular access to the discount
window and should refrain from incurring daylight overdrafts in their Federal Reserve accounts.
In the event that any daylight overdrafts occur, the Edge Act or agreement corporation must post
collateral to cover the overdrafts. Edge Act and agreement corporations that have branches in
more than one Federal Reserve District are monitored on a consolidated basis.
2. Bankers’ banks 106
Bankers’ banks, including corporate credit unions, are exempt from reserve requirements
and are not eligible for regular access to the discount window. Bankers’ banks may voluntarily
waive their exemption from reserve requirements and thus become eligible for regular access to
104

Institutions that are not eligible for regular access to the discount window are also not eligible for fully
collateralized cap breach waivers. For more information on fully collateralized cap breach waivers, refer to part B
of the Daylight Overdraft Monitoring and Management section (IV) of this Guide.
105
These institutions are organized under section 25A of the Federal Reserve Act (12 U.S.C. 611-631) or have an
agreement or undertaking with the Board of Governors under section 25 of the Federal Reserve Act (12 USC 601604(a)).
106
For the purposes of the Federal Reserve’s PSR policy, a bankers' bank is a financial institution that is not required
to maintain reserves under the Federal Reserve's Regulation D (12 CFR 204) because it is organized solely to do
business with other financial institutions, is owned primarily by the financial institutions with which it does
business, and does not do business with the general public. Such bankers’ banks also generally are not eligible for
Federal Reserve Bank credit under the Board’s Regulation A (12 CFR 201.2(c)(2)).

Special Situations 45
_________________________________________________________________________
the discount window. Such bankers’ banks would be free to establish net debit caps and would
be subject to the PSR policies in the same manner as other institutions. Bankers’ banks that have
not waived their exemption from reserve requirements should refrain from incurring overdrafts
and must post collateral to cover any daylight overdrafts they do incur.
3. Limited-purpose trust companies 107
The Federal Reserve Act permits the Board to grant Federal Reserve membership to
limited-purpose trust companies subject to conditions the Board may prescribe. As a general
matter, member limited-purpose trust companies do not accept reservable deposits and are not
eligible for regular discount-window access. Limited-purpose trust companies that maintain
Federal Reserve accounts should refrain from incurring overdrafts and must post collateral to
cover any daylight overdrafts that they incur.
4. Government-sponsored enterprises (GSEs) and international organizations 108
The Reserve Banks are fiscal agents for certain GSEs and international organizations in
accordance with federal statutes. These institutions are not subject to reserve requirements and
are not eligible for regular access to the discount window. GSEs and international organizations
should refrain from incurring daylight overdrafts and must post collateral to cover any daylight
overdrafts they do incur.

107

For the purposes of the PSR policy, a limited-purpose trust company is a trust company that, because of
limitations on its activities, does not meet the definition of “depository institution” in section 19(b)(1)(A) of the
Federal Reserve Act (12 USC 461(b)(1)(A)).
108
GSEs include 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 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 Reserve Banks ceased to act as fiscal agents for new issues of Sallie Mae securities upon
its privatization on December 29, 2004. The new Sallie Mae is not considered a GSE.

Self-Assessment Procedures 46
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VII. Self-Assessment Procedures
This section provides information and guidelines for institutions choosing to
perform a self-assessment to establish a net debit cap in the average, above average, or high
categories. 109 If an institution elects to establish a net debit cap through a self-assessment it
must analyze and evaluate four components:
•

Creditworthiness

•

Intraday funds management and control

•

Customer credit policies and controls

•

Operating controls and contingency procedures.

The institution must assign a rating based on its assessment to each of the above
components and then combine the ratings to determine the appropriate net debit cap category.
Part E of this section provides a matrix that must be used to combine the four components into a
single rating. Appendix A contains worksheets that should be used in conducting an assessment.
A Reserve Bank reserves the right to evaluate independently the four factors of an institution’s
self-assessment. If the Reserve Bank arrives at an overall rating that is lower than that
determined by the institution, the Reserve Bank’s evaluation will determine the institution’s cap
category. In addition, section II of this manual provides information on filing a resolution to
establish the cap once the self-assessment has been completed, and appendix B provides sample
resolutions.
A. Creditworthiness Component
For most institutions, the appropriate net debit cap category is principally
determined by the institution’s most-recent supervisory ratings and, for domestically
chartered institutions, the institution’s capital category. 110 In the self-assessment, an
institution’s creditworthiness is assigned one of the following ratings: excellent, very good,
adequate, or below standard. An excellent or a very good rating indicates that an institution
has demonstrated a sustained level of financial performance above its peer group norm. As
a general matter, fundamentally sound institutions that are experiencing only modest
weakness will receive a rating of adequate. The financial performance of such institutions
is usually at or just slightly below the peer norm.
109

An institution’s cap category in combination with an institution’s capital measure determines its net debit cap.
Domestically chartered institutions use 100 percent of their risk-based capital as their capital measure. U.S.
branches or agencies of FBOs use a percentage of their worldwide capital, based on their financial holding company
(FHC) status and their SOSA ranking, as their capital measure. For more information on the calculation of U.S.
branch
and agency capital measure calculation, refer to the Special Situations section (VI) of this Guide.
110
For the purposes of the self-assessment procedures, a domestically chartered institution’s capital category is
defined by the Federal Deposit Insurance Act.

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If an institution’s creditworthiness rating is adequate or higher, it may then proceed to
rate the other three components in the self-assessment process, subject to the provisions
regarding affiliated entities, discussed below. The institution’s assessment of the other three key
components will determine whether its composite rating will be lower than or equal to that
determined by the creditworthiness component. The rating should be recorded in the assessment
worksheet found in appendix A.
Matrix approach to assessing creditworthiness
In most instances, an institution’s creditworthiness component is determined by the
creditworthiness matrix, which translates an institution’s supervisory rating and, for domestically
chartered institutions, the institution’s capital category, into a creditworthiness assessment. This
approach is designed to simplify the process of assessing creditworthiness. Domestically
chartered institutions should use table VII-1 to determine their creditworthiness component, and
U.S. branches and agencies of FBOs should use table VII-2.
Certain conditions, however, may affect the creditworthiness of the institution and, as a
result, the Reserve Bank may require the institution to perform a full assessment of its
creditworthiness. A full assessment of creditworthiness includes an assessment of capital
adequacy, key performance measures (including asset quality, earnings performance, and
liquidity), and the condition of affiliated institutions. The institution’s primary regulator may
review the full assessment. The Reserve Bank may, in consultation with the primary supervisor,
deny an institution access to intraday credit or modify the institution’s net debit cap. Examples
of certain conditions that warrant an institution’s performing a full assessment of its
creditworthiness, regardless of an institution’s supervisory ratings or capital category, are
•

If the institution is a financial holding company (FHC) and is in a cure period 111

•

Any significant developments that may materially affect the financial condition or
supervisory assessment of the institution.

Procedures for completing a full assessment of creditworthiness are contained in
appendix A, along with the worksheets that may be used for this process. In its self-assessment
submission, an institution performing a full assessment of creditworthiness must cite the critical
factors that would support a proposed creditworthiness rating differing from that indicated by the
matrix approach. For example, such factors might include the establishment of a firm plan to
achieve a level of capital commensurate with a designation of adequately capitalized, which has
been approved by the institution’s primary supervisor and Reserve Bank. Significant
enhancements in the institution’s available liquidity or reductions in its problem assets could also
be used to support a higher rating in the context of a full assessment of creditworthiness.
However, the reasons for greater emphasis on other factors should be well documented in the
submission by the institution’s management. Regardless of the results of the full assessment of
111

A cure period is a provisional time period where an institution is allowed to resolve issues related to its
noncompliance with regulatory requirements.

Self-Assessment Procedures 48
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creditworthiness, the creditworthiness rating achieved is not necessarily related to or reflective of
the rating that would result from a regulatory examination.
Table VII – 1: Creditworthiness Matrix for Domestically Chartered Institutions*
Supervisory composite rating 112
Capital category

Strong

Satisfactory

Fair

Marginal or
unsatisfactory

Well capitalized

Excellent

Very good

Adequate

Below
standard

Adequately
capitalized

Very good

Very good

Adequate

Below
standard

Undercapitalized

**

**

Below
standard

Below
standard

Significantly or
critically
undercapitalized

Below
standard

Below
standard

Below
standard

Below
standard

*If an institution has affiliates, the supervisory composite rating incorporates an assessment of the condition of
affiliates. Appendix A contains worksheets that should be used to incorporate the condition of affiliates into the
supervisory composite rating.
** Institutions that fall into this category should perform a full assessment of creditworthiness. A full assessment of
creditworthiness includes an assessment of capital adequacy, key performance measures (including asset quality,
earnings performance, and liquidity), and the condition of affiliated institutions.

Under the matrix approach, a domestically chartered institution with capital ratios within
the category of well capitalized or adequately capitalized and with a supervisory composite
rating of strong, satisfactory, or fair will generally qualify for a positive net debit cap category.
An institution that has received a supervisory rating of marginal or unsatisfactory, or has capital
ratios within the significantly or critically undercapitalized category would receive a below
standard rating for creditworthiness and would not qualify for a positive net debit cap. A below
standard rating would also be assigned if an institution received a supervisory rating of fair and
its capital ratios fall within the undercapitalized category. In these situations, the primary
supervisor will have communicated to the institution’s directors and management its concerns
with respect to capital, asset quality, or other less-than-satisfactory conditions. Supervisory
112

Supervisory composite ratings, such as the Uniform Bank Rating System (CAMELS), are generally assigned on a
scale from 1 to 5, with 1 being the strongest rating. Thus, for the purposes of the Creditworthiness Matrix, a
supervisory rating of 1 is considered Strong; a rating of 2 is considered Satisfactory; a rating of 3 is considered Fair;
and so on.

Self-Assessment Procedures 49
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actions will also have been initiated requiring prompt corrective action in order to prevent further
impairment of the institution’s viability. For institutions whose supervisory composite rating is
Strong or Satisfactory and whose capital ratios fall within the category of undercapitalized, the
institution must perform a full assessment of creditworthiness.
Table VII – 2: Creditworthiness matrix for U.S. branches and agencies of foreign banks
U.S. Operations Supervisory Composite Rating*
SOSA ranking 113
Strong

Satisfactory

Fair

Marginal or
unsatisfactory

SOSA 1

Excellent

Very good

Adequate

Below
standard

SOSA 2

Adequate

Adequate

**

Below
standard

SOSA 3

Below
standard

Below
standard

Below
standard

Below
standard

* When the FBO operates multiple branches and agencies in the United States, the U.S. Operations Supervisory
Composite Rating should reflect the entire U.S. presence of the FBO. Because of the availability of supervisory
ratings that reflect an FBO’s entire U.S. presence, FBOs do not have to use appendix A to incorporate an affiliate’s
financial condition into the U.S. Operations Supervisory Rating.
** Institutions that fall into this category should perform a full assessment of credit worthiness. A full selfassessment includes an assessment of capital adequacy, key performance measures (including asset quality, earnings
performance, and liquidity), and the condition of affiliated institutions.

U.S. branches and agencies of FBOs that are ranked SOSA 1 or 2 and that have a U.S.
Operations Supervisory Composite Rating of strong, satisfactory, or fair will generally qualify
for a positive net debit cap. However, institutions that are ranked SOSA 2 and that have a U.S.
Operations Supervisory Composite Rating of fair will have to perform a full assessment of
creditworthiness in order to qualify for a positive net debit cap. An institution that has received a
SOSA ranking of 3 or that has a U.S. Operations Supervisory Composite Rating of marginal or
unsatisfactory would receive a below standard rating for creditworthiness and would not qualify
for a positive net debit cap. In these situations, the primary supervisor will have communicated
to the institution’s directors and management its concerns with respect to capital, asset quality, or
other less than satisfactory conditions.

113

In October 2000, Strength of Support Assessment (SOSA) rankings were made available to foreign banking
organizations’ management and the FBOs’ home country supervisor. For full text, see SR Letter 00-14 (SUP),
Enhancements to the Interagency Program for Supervising the U.S. Operations of Foreign Banking Organizations,
October 23, 2000.

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Affiliated institutions
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 allows the
Federal Deposit Insurance Corporation (FDIC) to hold an insured institution liable for any losses
incurred from the failure of a commonly controlled institution. Thus, an institution could
become insolvent should the deposit insurer elect to assess the institution the costs incurred from
a failed commonly controlled institution. For institutions that are affiliates of a multibank
holding company, the creditworthiness rating would be affected if the condition of one or more
of the commonly controlled institutions is deemed marginal or unsatisfactory by the primary
supervisor and one or more of these institutions represents a material portion of the
organization’s consolidated assets or materially affects the organization’s consolidated
operations. Appendix A contains worksheets that should be used to incorporate the condition of
affiliates into the supervisory composite rating. This situation may arise when a supervisory
agency discloses material operating or financial weakness within the parent company, or
affiliated institutions, that pose significant risk to an institution. When such situations arise, the
Reserve Bank will assign the institution a zero cap.
If the parent company and related affiliates are in satisfactory condition, no further
adjustment needs to be made to the results of the institution’s self-assessment. Such findings will
normally be supported by evidence that the holding company serves as a source of strength to the
institution; that is, it is willing and able to provide capital contributions or other managerial and
financial support to the institution. If the management performing the assessment does not have
the information needed for assessing the condition of affiliated institutions, it should confer with
the financial officers of the holding company.
U.S. branches and agencies of foreign banking organizations
An FBO should undergo the same self-assessment process as a domestic bank in
determining a net debit cap for its U.S. branches and agencies. U.S. branches and agencies of
FBOs, however, cannot be separated from the FBO. As a result, all of the U.S. branches and
agencies 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.
In addition, because many FBOs do not have the same management structure as U.S.
institutions, the FBO may need to adjust its internal review of its self-assessment and cap
category. If an FBO’s board of directors has a more-limited role in the bank’s management than
a U.S. board has, the self-assessment and cap category should be reviewed by senior
management at the FBO’s head office that exercises authority over the FBO equivalent to the
authority exercised by a board of directors over a U.S. institution. In cases in which the board of
directors exercises authority equivalent to that of a U.S. board, cap determination should be
made by the board of directors.
In addition, for FBOs, the file that is made available for examiner review by the U.S.
offices of an FBO should contain the report on the self-assessment that the management of U.S.
operations made to the FBO’s senior management and a record of the appropriate senior
management’s response or the minutes of the meeting of the FBO’s board of directors or other
appropriate management group, at which the self-assessment was discussed.

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Because the creditworthiness of the U.S. branch or agency of an FBO reflects the
creditworthiness of the entire organization and the condition of the U.S. operations, the Federal
Reserve’s PSR program uses SOSA rankings and U.S. Operations Supervisory Composite
Ratings to determine an FBO’s creditworthiness. In addition, if the ARB is unable to obtain
adequate information regarding the creditworthiness of the institution, the ARB may assign the
institution a net debit cap of zero.
Supervisory examination and rating information relating to domestically chartered institutions
and foreign banking organizations
Examination reports and any correspondence from supervisory agencies regarding the
institution’s condition, including supervisory ratings and any of its components, are considered
confidential information. Consequently, an institution’s management must ensure that
supervisory information is provided only to appropriate individuals within the institution,
supervisory agencies, and Reserve Banks.
B. Intraday Funds Management and Control
The purpose of the analysis of intraday funds management and control is to assess an
institution’s ability to fund its settlement obligations on a daily basis across all payment systems
in which it participates. The analysis requires the involvement of funds management, credit, and
operations personnel and a review of payment activity over a period of time. A Payment Flows
Worksheet is provided in appendix A (table A-3) to assist institutions in analyzing their daily
payment activity.
To obtain a complete understanding of its funds movements, an institution should have a
good understanding of its daily use of intraday credit as well as its use of intraday credit on
average over two-week periods. The analysis should cover a sufficient period of time so that an
institution can determine its peak demand for intraday credit and can also establish its average
use of such credit. The more volatile an institution’s payment activity, the longer the interval that
should be selected for analysis. The analysis will need to incorporate all operational areas with
access to payment systems. In addition to large-dollar funds and book-entry securities transfer
activity, the review should address check clearing, ACH, currency operations, and other payment
activity that results in relatively large-value settlement obligations. Thus, the analysis should not
be limited to on-line payment systems, nor should it be limited to payment systems to which the
institution has on-line access. Additionally, institutions with direct access to Fedwire or other
payment systems in more than one Federal Reserve District must combine all of these access
points into a single integrated analysis.
In performing the analysis, the institution should consider both liquidity demands and the
potential credit risks associated with participation in each payment system. The institution’s
capacity to settle its obligations in both routine and nonroutine circumstances should be carefully
assessed. A complete assessment of an institution’s ability to control its intraday obligations
extends, in many cases, beyond its ability to control its use of Federal Reserve intraday credit
within the constraints of its net debit cap. Importantly, it also extends to the institution’s ability

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to control its position across all payment systems to a level that permits it to fund its obligations
on a regular basis. This type of assurance requires an institution to understand fully the nature of
its obligations and to establish systems that permit it to monitor daily activity and to respond to
unusual circumstances.
Liquidity requirements
An institution participating on one or more large-dollar clearing and settlement systems
must manage its position on each system, comply with net debit caps or other risk controls on
each system, and assure itself that it has the capacity to satisfy all of its settlement obligations
each business day. Other privately operated, large-dollar systems used by institutions include the
Clearing House Interbank Payments System (CHIPS) and Depository Trust Company (DTC).
To assess its average daily liquidity requirements, an institution participating on multiple
systems should determine the magnitude and relative importance of the various payments
flowing through its Federal Reserve account as well as the payments flowing over each privately
operated clearing and settlement system. For each payment service used, liquidity sources
should be assessed to determine whether sufficient funding is regularly obtainable to satisfy
obligations. In making this assessment, an institution should consider the creditworthiness of its
counterparties as well as its customers. In addition, it should consider potential liquidity
demands associated with the default of another participant in a privately operated clearing and
settlement arrangement, such as CHIPS, DTC, a local check clearinghouse, a privately operated
ACH system, an automated teller machine or point-of-sale network, or a credit card settlement
arrangement. The institution’s capability to obtain the necessary funding before the end of a
business day in the event that a major counterparty, correspondent, customer, or member of a
privately operated clearing and settlement system were to default on its net settlement
obligations is particularly important in this assessment.
For example, if a customer that is an active user of payment services and also a
significant user of intraday credit were unable to cover its settlement obligations, an institution
would need to be able to fund those obligations by the close of business on the given settlement
day. Similarly, if a participant in a local check clearing arrangement were to default on its
settlement obligation, it is likely the settlement for that arrangement would be recast and each of
the other participants in the arrangement would experience a change in its net settlement
obligation. Participants in such arrangements should review the rules of the arrangement and
determine the credit and liquidity risks to which they are exposed. In each of these cases,
management should ensure that it has the capability to obtain the necessary funding late in the
day to cover such unexpected occurrences.
Monitoring and control capabilities
Once the payment environment has been defined, the institution should evaluate its
account monitoring capability. Organizations that have branches operating in more than one
Federal Reserve District and have more than one Federal Reserve account, such as U.S. branches
and agencies of foreign banking organizations, should determine how the institution’s net debit
cap will be allocated across its accounts, and each office maintaining a Federal Reserve account
should be responsible for monitoring its account within the constraint of its cap allocation. At

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the same time, one office should be assigned the responsibility to oversee consolidated payment
activity, and the self-assessment should reflect the monitoring capability of the consolidated
entity. The designated office will be expected to be knowledgeable of the payment activity at all
offices and be able to respond to questions received from the Federal Reserve or the institution’s
primary supervisor.
Monitoring capabilities may be classified as real-time or periodic. A real-time
monitoring system accounts for each large-dollar funds transfer, book-entry securities transfer,
and net settlement entry as it is sent or received and recognizes “off-line” activity, such as check
and ACH, as data become available or in a manner that reflects the Federal Reserve’s posting
rules for payments settled through Federal Reserve accounts. 114 Institutions participating on
multiple large-dollar systems may use several monitoring systems to track activity. A periodic
monitoring system provides balance information reflecting Fedwire funds and book-entry
securities transfer activity or other large-dollar transactions, such as CHIPS messages, plus
off-line transactions at specific intervals, such as every fifteen minutes, thirty minutes, or hour.
C. Customer Credit Policies and Controls
The assessment of an institution’s customer credit policies and controls requires the
following distinct analyses:
•

An analysis of the institution’s policies and procedures for assessing the
creditworthiness of its customers, its counterparties, and its correspondents

•

An analysis of the institution’s ability to monitor the positions of individual customers
and to control the amount of intraday and interday credit extended to each customer.

The analyses require the involvement of both credit and operations personnel and should
focus on the creditworthiness of all customers, including corporate and other institutions, that are
active users of payment services. In addition, the creditworthiness of correspondents and all
counterparties on privately operated clearing and settlement systems should be assessed.
For institutions that have arranged with a third-party service provider to process
payments, it is recognized that certain operational controls may be established in either the funds
and book-entry securities transfer operation of the service provider or the institution’s own
operation, depending on the nature of the arrangement. In any case, the standards for customer
credit control and monitoring are to be applied uniformly and extended to the service provider’s
operation as appropriate. 115

114

The schedule of posting rules is located in part II of the PSR policy, available at
http://www.federalreserve.gov/paymentsystems/psr_policy.htm.
115
For more information, please see Outsourcing of Information and Transaction Processing, SR Letter 00-4,
February 29, 2000.

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General credit policies
The assessment of credit policies is one of the most important components of the selfassessment because credit policies are essential in controlling the risks faced by the institution.
The purpose of this analysis is to evaluate how effectively an institution controls the credit risk to
which it is exposed in extending interday and intraday credit in connection with the provision of
payment services to customers that maintain accounts with the institution. The section also
addresses the credit risk faced by the institution from correspondents and counterparties on
privately operated clearing and settlement arrangements. There are several elements to the
analysis. First, the institution’s formal credit policies should be assessed. Second, customers
that are active users of payment services should be identified, as should the institution’s
correspondents and counterparties on privately operated clearing and settlement systems. Third,
the approach used to assess the creditworthiness of customers and correspondents and the
method used to establish credit limits for counterparties on privately operated clearing and
settlement systems should be reviewed.
Sound credit policies should address all credit relationships the institution has with a
customer, both explicit lending and intraday lending as a result of providing payment services.
Fundamentally, the institution must establish
•

Formal, written credit policies that articulate sound credit standards
that are approved by the institution’s board of directors

•

Procedures to ensure that policies are communicated, understood, and
faithfully executed

•

Controls at the customer level to ensure that the credit evaluations of
individual customers or decisions concerning limits on interday and
intraday credit extensions are followed.

Identification of customers, correspondents, and counterparties
An institution should review its customers’ payment activity to identify those customers
that are active users of payment services. These customers should be classified according to the
peak value of payments and the types of services used, such as large-dollar funds transfers,
book-entry government securities transfers, other large-dollar securities services (such as
commercial paper), ACH, and check. It is important to be familiar with the types of payment
services that each customer uses because of the unique risks that various services may pose to the
institution.
An institution should also review the financial condition of correspondents with which it
transacts business such as clearing checks, obtaining securities safekeeping services, and
obtaining securities transfer services. The institution should ensure, on a regular basis, that the
financial condition of all correspondents is satisfactory. If signs of deterioration are observed,
steps should be taken to reduce balances and the volume of activity conducted through the
correspondent.

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In addition, an institution should evaluate its counterparties on all large-dollar clearing
and settlement systems that require participants to set bilateral credit limits with each other.
Some clearing and settlement systems, such as securities depositories and ACH systems, manage
the credit risk posed by participants centrally. In these systems, individual participants may not
be able to control explicitly the exposure they face from other participants by setting credit
limits. For these types of systems, institutions should assess the exposure they might face due to
a participant’s default by assessing the value of transactions exchanged with other participants or
the loss allocation methodology employed by the system. Institutions should ensure that they
would have the ability to fund a change in their settlement position were a participant on such a
system unable to settle.
Assessment of customer, correspondent, and counterparty creditworthiness
For all accountholders that are identified as being active users of payment services,
whether they are financial institutions or corporate customers, the institution should evaluate
each customer’s creditworthiness and determine the amount of intraday credit it is willing to
provide to each customer. The establishment of intraday credit limits should be consistent with
the institution’s overall relationship with the customer. In addition, such credit limits should be
set conservatively and should not exceed a customer’s typical payment needs, even if the
customer has a very high credit rating. Credit limits should be comprehensive and cover all
payments processed on behalf of each customer. Further, for customers that use ACH services or
other services that create interday risk, interday credit limits (or prefunding requirements that
would preclude credit extensions) for such services should be established as well.
If an institution deals with correspondents, the institution should determine the value of
transactions cleared through each correspondent as well as other exposures that it faces from
each correspondent and establish limits on those exposures that reflect the institution’s
assessment of the creditworthiness of each correspondent. In the case of counterparties on
privately operated large-dollar clearing and settlement systems, institutions should determine the
amount of credit they are willing to extend to each of the other participants on the system. These
limits should be set conservatively, and they should take into consideration other exposures to
the counterparty, such as correspondent and respondent relationships and other privately operated
systems on which the institution participates.
For accountholders as well as correspondents and counterparties on private clearing and
settlement systems, changes in payment practices as well as changes in financial condition
should be monitored on a regular basis. If changes are identified, steps should be taken to
reassess credit limits, direct payment activity to other institutions, change bilateral credit limits,
or modify the methods used to control the payment services provided to the institution.
Monitoring customer activity
Once the active customers have been identified, the systems used to monitor those
customers’ payment activity, both intraday and interday, should be reviewed. These systems
need not be complex automated systems that fully integrate every transaction. Rather, the
systems should monitor and control all significant transactions processed for the customer. It is
reasonable to assume that all large-dollar funds and book-entry securities transfers should be

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included in any monitoring system. If the customer collects high-dollar volumes of checks, uses
the ACH mechanism extensively, makes large cash deposits, or is an active participant in
securities markets, such activity should also be reflected in monitoring systems. Additionally, if
the institution decides not to include certain types of transactions in monitoring systems on a
regular basis, procedures should be established to track other transactions that might materially
affect the customer’s’ use of intraday and interday credit.
In many institutions, separate monitoring systems have been established to monitor
customer activity by type of business, such as funds activity or government securities activity, or
to monitor each of a customer’s accounts separately. While such approaches can be used to
control risk through the allocation of credit limits among the various monitoring systems, they do
not permit institutions to observe closely the aggregate position of a customer and to identify
unusual behavior quickly. Attempts should be made to establish interfaces among diverse
monitoring systems. Such interfaces could be achieved by providing access to all monitoring
systems to the account officer or by designating a primary system to which data could be fed
from other systems periodically to provide one consolidated view of customers’ intraday and
interday positions.
Intraday Payment Activity. Intraday monitoring systems should reflect the customer’s
opening balance at the beginning of the day, and material transactions should be posted to the
account as information regarding the transactions becomes available throughout the day. If
certain customers are required to pledge collateral to protect the institution providing credit to
them, procedures should ensure that the collateral is acceptable. Monitoring systems should
capture the market value or other assigned value of the collateral and ensure that intraday
extensions of credit are adequately secured. Further, monitoring systems must have the
capability to identify any transaction that would result in a credit limit being exceeded and to
hold that transaction until an account officer reviews it and determines how the transaction
should be handled.
To control the risk associated with clearing and settling for book-entry securities
transfers, institutions should assess the creditworthiness of their customers and ensure that the
customer has the ability to fund consistently its daily activity. In this respect, it is important for
institutions to understand the intraday flows associated with their customer’s book-entry
securities activity in order to gain an understanding of peak funding needs. Depending upon the
creditworthiness of the customer and the nature of the activity, an institution might require its
customers to take any or all of the following steps:
•

Advise the institution of expected incoming securities transfers.

•

Prefund all such transfers, with the understanding that any transfer not
prefunded may be returned.

•

Collateralize all intraday overdrafts.

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Interday Payment Activity. To control interday risk arising from the origination of ACH
credit transactions, institutions should also establish interday monitoring systems. The credit
limits in those systems should be set in conjunction with each customer’s overall interday credit
limit. Institutions should periodically assess the creditworthiness of their customers and ensure
that the established credit limits continue to be appropriate. For customers in weak financial
condition, institutions should have the capability to pend or reject, in real time, transactions that
would exceed credit limits for these customers.
To control the return item risk associated with originating ACH debit transactions and
collecting checks on behalf of customers, an institution should ensure that each customer has the
capability to pay return items after it has been granted funds availability by the institution. In
addition, if a customer’s financial condition begins to deteriorate, the institution should analyze
the customer’s return-item history and delay availability of funds or place holds on the account,
as appropriate.
D. Operating Controls and Contingency Procedures
The purpose of the analysis of operating controls and contingency procedures is to assess
the integrity and the reliability of an institution’s payment operations to ensure that they are not a
source of operating risk. The integrity of operations is of particular concern because operational
errors and potential fraud can increase the cost of payment services and can undermine the
confidence of the public in the payment mechanism. Similar results can occur if payment
systems are unreliable and parties making and receiving payments do not have confidence that
payments will be made on a timely basis.
The analysis of operating controls and contingency procedures is divided into two parts.
The first part discusses the principal controls that institutions should use in payment processing
to ensure that their operations are safe and secure. The second part discusses briefly the need for
sound contingency procedures as a means of increasing payment system reliability.
Controls over payment operations
Institutions providing electronic payment services should be aware of and employ a
comprehensive set of controls designed to ensure the integrity of payments and the processing
system, limit access to devices and systems to authorized personnel, and prevent fraudulent or
erroneous messages or payments from being initiated.
Within each broad category of controls there are numerous alternative solutions that may
be employed depending on the technology available, staffing levels, and the nature of the
customer base. The following discussion outlines the general controls that should be
implemented, the rationale for each control, and some examples of typical control arrangements.
Integrity of payment processing systems. Virtually all electronic payment systems use
computer software to process payments. Institutions should ensure that software is tightly
controlled so that it cannot be modified inadvertently or for fraudulent purposes. Methods of
accomplishing this include (1) using dual controls for changes to the production environment, (2)

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conducting extensive user testing involving a wide range of test cases, (3) limiting the number of
people who have access to the system to a necessary few, (4) ensuring that the version of
software that is tested is, in fact, the version put into production, and (5) limiting access to
system documentation only to authorized users.
On-line access to the payment-processing system. Once an electronic payment system is
put into production, the ability for employees or customers to initiate transactions should be
strictly limited to authorized individuals. Furthermore, the accuracy and validity of payments
created by authorized staff should be regularly monitored. Methods of accomplishing this
include (1) limiting physical access to payment-origination facilities, such as terminals, (2) using
log-on IDs and passwords, (3) changing passwords regularly and making sure they are not
written down or available to others, (4) using message authentication codes to ensure that
payments are not altered during storage or transmission, (5) establishing dual controls over
message creation (one person keys in, another person validates), and (6) maintaining good audit
trails of payments originated and received.
Off-line payment initiation and delivery processes. Electronic payment fraud may result
from poor controls over off-line payment initiation or delivery; “off-line” refers to the use of
telephones, letters, or facsimile machines. Institutions must ensure that messages originate from
and are delivered to authorized parties. In all cases, message integrity must be maintained.
Because access to a telephone or facsimile machine is difficult to control, the normal on-line
access controls cannot be used. Consequently, institutions should use procedures such as (1)
maintaining authorized lists of institution or customer personnel who can send or receive
payments, (2) using controlled code words known only to the two parties, (3) using multi-party
call-back procedures, (4) recording and monitoring telephone calls, and (5) using sequence
numbering schemes for maintenance of audit trails.
Authorized staff. Care should always be taken to screen personnel employed in or with
access to electronic payments areas, including programmers, analysts, computer operators,
managers, clerical staff, and custodial staff. Management should have complete confidence in
the honesty and integrity of all involved staff members. Controls, subject to appropriate statutes,
that can be employed could include the following: pre-employment screening, ongoing
monitoring of potential conflicts of interest, immediate removal from sensitive positions or
system access of personnel who have resigned or been terminated, and specific security controls
over access to offices and machines during nonbusiness hours.
Contingency procedures
Despite the current level of automation and technology in use in the financial industry,
situations arise that can cause significant interruptions in the provision of electronic payment
services. These interruptions can entail outages of short duration, such as temporary losses of
power and breaks in telecommunications, or longer, sometimes indefinite, outages, which may
be caused by fire, flood, and earthquake. Such occurrences not only place an institution and its
customers at risk but also can have serious systemic risk implications in the case of a very large
institution. When computer systems are not operational during such events, account balances
may be unavailable and normal investment and trading capabilities may be interrupted.

Self-Assessment Procedures 59
_________________________________________________________________________
Contingency procedures should be devised to cover three main areas of exposure: (1)
hardware and software systems, (2) data communications systems, and (3) physical operations
facilities. The following paragraphs outline the general areas of consideration and provide some
examples of typical control arrangements.
Hardware and software systems. Virtually any hardware or software system can
experience problems that cause normal processing to stop. Institutions should devise and
periodically test backup procedures to ensure that processing can be resumed on a sufficiently
timely basis to minimize institutional risk.
Techniques that can be employed to mitigate this risk include the following:
(1) redundant hardware and software to replace or take over operations from inoperable systems,
(2) off-line backup plans, accommodating a limited number of key electronic files or payments,
and (3) off-site disaster recovery facilities where computer operations can continue in case of a
major outage.
Data communications systems. It is possible for telecommunications facilities to be
unavailable to an institution even though computer systems are still running. Consequently,
institutions should have backup facilities for all key data communications capabilities, including
data security devices, to ensure that breaks in telecommunications service do not cripple the
institution’s operations and services. Techniques that can be used include backup leased or dial
access lines to in-house systems, external networks, and key customer locations, spare or
redundant equipment for such devices as modems, encryption boxes, and controllers, and off-line
communications procedures, where feasible.
Physical operations facilities. Electronic funds transfer operating areas, including the
area’s desks, telephones, terminals, personal computers, copying machines, and facsimile
machines, could be disabled in the event of a site disaster. Consideration should be given to the
following options:
•

Identifying an alternate physical facility into which operations staff
can be relocated

•

Developing plans to acquire or use terminals, personal computers, and
other necessary office equipment

•

Installing and testing telecommunications capabilities to the backup
site.

Minimizing operating risk in a contingency situation is a difficult task that requires
significant advance planning. Plans should be fully documented, regularly reviewed, and tested
to ensure that changes are accommodated over time, and that all personnel are familiar with their
responsibilities.

Self-Assessment Procedures 60
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E. Overall Self-Assessment Rating
Table VII-3 integrates the components of the self-assessment into an overall selfassessment rating that indicates the institution’s appropriate net debit cap category, subject to
Reserve Bank approval.
Table VII-3
Combined Assessment of Cap Category
Creditworthiness

Intraday
funds
management
& control

Customer
credit
policies &
controls

Operating
controls &
contingency
procedures

Overall
assessment
(cap category)

Excellent

Strong

Strong

Satisfactory

High

Excellent

Strong

Satisfactory

Satisfactory

Above average

Excellent

Satisfactory

Strong

Satisfactory

Above average

Excellent

Satisfactory

Satisfactory

Satisfactory

Above average

Very good

Strong

Strong

Satisfactory

Above average

Very good

Strong

Satisfactory

Satisfactory

Average

Very good

Satisfactory

Strong

Satisfactory

Average

Very good

Satisfactory

Satisfactory

Satisfactory

Average

Adequate

Strong

Strong

Satisfactory

Average

Adequate

Strong

Satisfactory

Satisfactory

Average

Adequate

Satisfactory

Strong

Satisfactory

Average

Adequate

Satisfactory

Satisfactory

Satisfactory

Average

Below
standard

Any rating

Any rating

Any rating

Zero

Any rating

Unsatisfactory

Any rating

Any rating

Zero

Any rating

Any rating

Unsatisfactory

Any rating

Zero

Any rating

Any rating

Any rating

Unsatisfactory

Zero

Self-Assessment Worksheets A-61
_________________________________________________________________________
Appendix A: Self-Assessment Worksheets
The procedures and worksheets in this appendix were prepared for institutions to use as a
basis for completing a self-assessment required to establish a daylight overdraft net debit cap in
the average, above average, or high cap categories. Prior to performing the assessment,
institutions should carefully review section VII of this manual, which provides additional
discussion of the components of the assessment. Appropriate documentation supporting the
results of the assessment should be attached to all parts of the worksheets and kept on file for
review by the institution's primary supervisor. Comments on various factors essential to the
self-assessment may be attached as necessary, provided the comments reference the appropriate
worksheet.
The index below indicates the location of the various components of the self-assessment
including (1) creditworthiness, (2) intraday funds management and control, (3) customer credit
policies and controls, and (4) operating controls and contingency procedures. Institutions
normally must use the Creditworthiness Matrix method (1.A.), which relies on recent capital
levels and supervisory examination ratings, to determine their creditworthiness rating. The full
self-assessment of creditworthiness (1.B.) is permitted, or in some cases required, in certain
circumstances. These circumstances, which are discussed further in section VII of this manual,
might include a significant change in financial condition, the availability of additional
substantive information about the institution's financial condition not available at the time of the
last examination, or a significant improvement in areas of concern to the primary supervisor
since the last examination. All institutions should complete components 2, 3, and 4. Ratings for
the four components should be recorded in table A-4 to arrive at the institution’s final selfassessment rating.

Self-Assessment Worksheets A-62
_________________________________________________________________________
Index
1. Assessment of Creditworthiness .............................................................................................63
1.A. Creditworthiness Matrix Procedures ...........................................................................63
1.B. Full Assessment of Creditworthiness Procedures........................................................66
1.B.i. Capital Adequacy .........................................................................................................68
1.B.ii. Key Performance Measures .......................................................................................70
Asset Quality .....................................................................................................................70
Earnings Performance .....................................................................................................73
Liquidity............................................................................................................................75
1.B.iii. Condition of Affiliated Institutions ..........................................................................77
1.B.iv. Integrating the Three Factors ...................................................................................78
2. Assessment of Intraday Funds Management and Control ...................................................80
3. Assessment of Customer Credit Policies and Controls .........................................................82
3.A. Assessment of Credit Policies ........................................................................................82
3.B. Assessment of Customer, Correspondent, and Counterparty Creditworthiness .....83
3.C. Monitoring Customer and Counterparty Intraday Payment Activity ......................84
3.D. Monitoring Customer Interday Payment Activity ......................................................86
3.E. Overall Rating: Customer Credit Policies and Controls ............................................86
4. Assessment of Operating Controls and Contingency Procedures .......................................88
4.A. Internal Operating Controls .........................................................................................88
4.B. Contingency Procedures ................................................................................................89
4.C. Overall Rating: Operating Controls and Contingency Procedures ..........................90
5. Combining the Four Components ..........................................................................................92

Self-Assessment Worksheets A-63
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1. Assessment of Creditworthiness
1.A. Creditworthiness Matrix Procedures for Domestically-chartered Institutions with
Affiliates
Supervisory Assessment
Record the composite rating from the last supervisory examination in the upper portion of
table A-1.
Capital Assessment
Compare the institution's capital ratios to thresholds established under section 38 of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) for the Capital
Zones for Prompt Corrective Action and record the results in the upper portion of table A-1.
Condition of Affiliates
The condition of the holding company and related affiliates must be considered in the
analysis of the institution's condition. In the evaluation of the condition of an institution's parent
company and affiliates, emphasis should be placed on the most recent supervisory ratings of the
affiliated institutions. It is recognized that management may not have the information needed for
assessing the condition of affiliated institutions. In such situations, management should confer
with the financial officers of the holding company.
The condition of the parent company or affiliated institutions will have either a neutral or
negative impact on the institution completing the assessment. If the parent company and related
affiliates are in satisfactory condition, no further adjustment needs to be made to the results of
the institution's self-assessment. Such findings will normally be supported by evidence that the
holding company serves as a source of strength to the institution; that is, it is willing and able to
provide capital contributions or other managerial and financial support to the institution.
The creditworthiness rating of an institution would be adjusted to below standard if the
condition of one or more of the commonly controlled institutions was deemed marginal or
unsatisfactory by the primary supervisor and the institution or institutions represent a material
position of the organization's consolidated assets or materially affects the organization's
consolidated operations. This situation may arise when a supervisory agency discloses material
operating or financial weakness within the parent company or affiliated institutions that poses
significant risk to the institution. When such situations arise, the institution will not qualify for a
positive net debit cap.
•

If the supervisory rating of affiliates is marginal or unsatisfactory, the assigned rating
is negative.

Self-Assessment Worksheets A-64
_________________________________________________________________________
•

If the supervisory rating of affiliates is fair or better, the assigned rating is neutral and
will not result in an upgrade or downgrade of the other factors.
Condition of Affiliates Rating:

Overall Creditworthiness Rating
Institutions should determine their creditworthiness rating by selecting the overall
creditworthiness rating in the right-hand column of table A-1 that corresponds to their ratings in
the other columns for their supervisory and capital assessments and the condition of their
affiliates. If the Creditworthiness Matrix reflects an overall rating of adequate or above, the
institution should record its creditworthiness rating in table A-4 (on page A-34) and proceed to
complete the remaining components of the self-assessment.
In some instances, the Creditworthiness Matrix result will indicate that a full assessment
of creditworthiness is appropriate, in which case the institution should not record the rating from
the matrix in table A-1, but should instead complete the procedures under part 1.B. of this
section. If the Creditworthiness Matrix shows an overall rating of below standard and the
institution cannot justify completing the full assessment of creditworthiness, the institution does
not qualify for a positive daylight overdraft cap and need not complete the remainder of the
assessment.

Self-Assessment Worksheets A-65
_________________________________________________________________________
Table A-1
Creditworthiness Matrix Summary

PRIMARY MEASURES
SUPERVISORY ASSESSMENT:
CAPITAL ASSESSMENT:
CONDITION OF AFFILIATES ASSESSMENT:

Supervisory
assessment

Capital
levels

Condition of
affiliates

Overall
creditworthiness

Strong

Well capitalized

Neutral

Excellent

Strong

Adequately capitalized

Neutral

Very good

Strong

Undercapitalized

Neutral

***

Satisfactory

Well capitalized

Neutral

Very good

Satisfactory

Adequately capitalized

Neutral

Very good

Satisfactory

Undercapitalized

Neutral

***

Fair

Well capitalized

Neutral

Adequate

Fair

Adequately capitalized

Neutral

Adequate

Fair

Undercapitalized

Neutral

Below standard

Marginal

Any level

Any rating

Below standard

Unsatisfactory

Any level

Any rating

Below standard

Any rating

Significantly undercapitalized

Any rating

Below standard

Any rating

Critically undercapitalized

Any rating

Below standard

Any rating

Any level

Negative

Below standard

*** Full assessment of creditworthiness must be performed.

Overall Creditworthiness Rating:

Self-Assessment Worksheets A-66
_________________________________________________________________________
1.B. Full Assessment of Creditworthiness Procedures
The following discussion covers the recommended method for completing the full
assessment of creditworthiness. The accompanying worksheets should serve as a guide in
completing this assessment. Institutions should record their ratings on these worksheets and in
the upper portion of table A-2.
There are three factors that must be considered in assessing creditworthiness:(1) capital
adequacy, (2) key performance measures, including asset quality, earnings performance, and
liquidity, and (3) the condition of affiliated institutions. In the self-assessment documentation,
each factor should be discussed separately and the rationale used to adjust or maintain the overall
creditworthiness rating should be explained. Exceptions or special considerations pertaining to
the evaluation must be discussed and documented for supervisory examiners.
An assessment that differs significantly from findings of the primary supervisor should be
particularly well documented and supported. It may be helpful to refer to the supervisor's
examination manuals for a description of the rating guidelines and procedures used to assess an
institution's condition. However, regardless of the results of the creditworthiness assessment, the
creditworthiness rating achieved is not necessarily related to or reflective of the rating that would
result from a regulatory examination. It should also be noted that the numerical benchmarks for
certain performance standards contained in these self-assessment procedures may be subject to
change.
In developing the assessment, the institution should compare its performance with
selected ratios and peer comparisons that are well recognized as performance standards by the
banking industry to determine its creditworthiness rating. The self-assessment may use
information derived from confidential internal sources, publicly available reports, or both. Some
common sources that provide the information needed for the creditworthiness assessment include
supervisory examination reports, management financial reports, supervisory performance
summaries, internal and external audit reports, rating agency reviews, and private-vendor
performance summaries. Performance summary reports, such as the Uniform Bank Performance
Report (UBPR) and the Bank Holding Company Performance Report (BHCPR), provide current
and historic financial peer data. 116 Also, similar information is available from bank trade
associations, public accounting firms, rating agencies, and other private vendors.

116

The UBPR and the BHCPR are available at www.ffiec.gov/.

Self-Assessment Worksheets A-67
_________________________________________________________________________
An institution's performance should be assessed in relation to its percentile ranking
within the peer group. Care should be exercised when choosing an appropriate peer group.
Regional peer groups are not appropriate if the region is experiencing economic conditions that
result in a lower performance for the peer group as a whole. In such situations, it is appropriate
to use a national peer group. Strong performance may be indicated by a high percentile when
certain measures of earnings and capital are analyzed, or a low percentile when certain asset
quality and liquidity measures are considered. Also, when evaluating the relative rankings, both
current performance and performance trends should be considered.
The following guidelines indicate appropriate ratings for performance relative to the peer
group:
•

Excellent - Performance consistently at or above the 75th percentile,
and most key measures above the 90th percentile;

•

Very good - Performance consistently above the 55th percentile, and most key
measures above the 75th percentile;

•

Adequate - Performance consistently above the 35th percentile, and
most key measures near peer averages. No significant measures in the
lowest 10th percentile, or below standards set by supervisory
authorities; and

•

Below standard - Performance measures consistently below average,
and significant weakness in one or more key measures.

An institution must justify and fully document any rating that is not consistent with the
above criteria. Greater emphasis should also be placed on comparisons to supervisory standards
when peer group norms reflect performance well below supervisory standards. Should the peer
group comparison result in a below standard rating, the appropriate creditworthiness rating is
also below standard.
It is recognized that only limited peer data are available for U.S. branches and agencies of
foreign-based banks. In such instances, the institution should refer to similar data used for U.S.
banking institutions. In making such comparisons, differences with respect to accounting
principles and financial practices should be considered when interpreting relative performance.

Self-Assessment Worksheets A-68
_________________________________________________________________________
1.B.i. Capital Adequacy
In most cases, the FDICIA Capital Zones for Prompt Corrective Action will apply as the
regulatory standard and general baseline for the capital adequacy component of the assessment
of creditworthiness. Even for institutions that are not subject to risk-based capital requirements,
or for those that believe that a higher capital adequacy rating than that currently indicated by the
capital zones is warranted, these zones should be used as a guide in developing the capital
adequacy rating.
If an institution's capital levels are below any of the federal guidelines, the appropriate
self-assessment rating for creditworthiness is usually below standard. An institution may provide
information to the supervisory agencies and appropriate Reserve Bank to support a higher rating.
In such cases, an institution will not receive an overall creditworthiness rating better than
adequate. For instance, if an institution's capital ratios are below the regulatory standard but the
institution has firm plans to increase its capital, it may adjust its ratios upward; however,
evidence supporting the upward adjustment to the institution's original ratios should be fully
documented. In addition, the capital adequacy rating should be adjusted downward if capital has
declined since the last examination or if management expects that capital will decline to below
minimum acceptable levels.
An FBO that is not based in a country that adheres to the Basel Capital Accord should
compare capital ratios calculated under home country rules to the regulatory standard and
document analysis that supports a conclusion that its capital meets or exceeds the standard. In
addition, if other minimum capital ratios are prescribed by any of the supervisory agencies, the
institution must address its level of compliance with such measures as well.

Self-Assessment Worksheets A-69
_________________________________________________________________________
Capital Adequacy Worksheet

Institution
(original)

Institution
(adjusted*)

Regulatory
standard

Tier I capital/risk-weighted
Assets

4.0%

Total capital/risk-weighted
assets

8.0%

Tier I capital/total assets

3.0%

Peer

Other ratios:

* If the institution's original capital ratios were adjusted for any reason, fully document the
calculations and assumptions used to perform the adjustment.

Based on the institution's original or adjusted capital levels, what is the highest capital
zone at or above which the institution is expected to remain for the next twelve months?

____

Well capitalized

____

Adequately capitalized

____

Undercapitalized

____

Significantly undercapitalized

____

Critically undercapitalized

Capital Adequacy Rating:

Self-Assessment Worksheets A-70
_________________________________________________________________________
1.B.ii. Key Performance Measures
Asset Quality
Asset quality assessment is often based on the level and trend of non-performing and
classified assets. Such information is available from internal management reports, supervisory
examination reports, and external audit summaries. It is recognized that only limited information
may be available for peer group comparisons. Provided, however, that such information is
current, supervisory examination findings and comparisons pertaining to asset quality may serve
as a starting point.
For example, the level and trend of weighted classified assets as noted in the last
supervisory examination report should be reviewed. This measure reflects the probability of loss
that has not yet been recognized. “Weighted classified assets” is defined as the sum of (1) 20
percent of substandard, (2) 50 percent of doubtful, and (3) 100 percent of loss classifications not
already charged off. The dollar amount of weighted classified assets should be compared with
Tier I capital plus the loan loss reserve. The institution's ratio of total classified assets to total
capital should also be reviewed. “Total classified assets” is defined as the sum of all
substandard, all doubtful, and all loss classifications not already charged off. The total of
classified assets should be compared with Tier I capital plus the loan loss reserve. In particular,
the level and severity of classifications should be carefully evaluated, as should the trends in both
the classification categories and ratio itself. The assessment of this ratio is a useful analytical
complement to the weighted classification ratio.
Additionally, the level of “other real estate” owned as a percent of average assets
available, which is also an indicator of an institution's asset quality, should be considered.
Normally, unacceptable levels of other real estate owned will adversely affect earnings
performance. An institution exhibiting a negative trend with respect to other real estate or with
levels consistently above their peer group should assign a below standard rating to this area.
Institutions with levels consistently below their peer group or institutions exhibiting a positive
trend would not need to adjust their ratings.
Levels of delinquent, nonperforming, and non-accrual loans as a percentage of total loans
or as a percentage of the allowance for loan and lease losses should be reviewed. These
measures should then be compared with supervisory standards and peer group norms. Ratings
assigned to asset quality are derived by referring to the guidelines described in this section
regarding peer group comparisons. Other considerations that should be factored into the
evaluation of asset quality include management's demonstrated ability to collect problem credits,
an assessment of credit concentrations to particular industries or geographic regions, adequacy of
loan loss reserves, and changes in lending policies and practices.

Self-Assessment Worksheets A-71
_________________________________________________________________________
Asset Quality Worksheet

Review the level and trend of weighted classified assets, as disclosed in the last
regulatory examination. In the absence of data for current weighted classified assets, review the
level and trend of noncurrent loans as a percentage of total loans and as a percentage of the
allowance for loan losses. These measures reflect the potential for loss within the institution.
Institutions that have had an examination within twelve months should use the first
method, below, to determine their ratings. Other institutions should use the second method.

1.

If the most recent examination was less than twelve months from the current date,
compare the weighted classified asset ratio (weighted classified assets to Tier I
capital plus loan loss reserve) with the following criteria to determine the
institution's rating.

Institution

Weighted
classified ratio

Rating

< 5%

Excellent

> 5% to 15%

Very good

> 15% to 30%

Adequate

> 30%

Below standard

Asset Quality Rating:

Self-Assessment Worksheets A-72
_________________________________________________________________________
Asset Quality Worksheet – continued

2.

If the examination data are unavailable or older than twelve
months, calculate the following ratios:

Ratio

Peer

Percentile

Non-current loans/total loans:
Non-current loans/loan loss allowance:
Total classified assets/total capital:
Other real estate/total assets:
Compare these ratios with the following table to determine the institution's rating:
Percentile

Rating

< 10th

Excellent

> 10th to 25th

Very good

> 25th to 50th

Adequate

> 50th

Below standard

Self-Assessment Worksheets A-73
_________________________________________________________________________
Earnings Performance
The evaluation of earnings performance relies heavily upon comparisons of key
profitability measures (such as return on assets and return on equity) to industry benchmark and
peer group norms. Important considerations in the evaluation of earnings are quantity, quality,
and trend. Also, a number of other factors, such as the level of nonrecurring items, exposure to
interest rate movements, coverage of potential loan losses or losses on other assets, and
overhead, must be factored into the evaluation process. The following worksheet should assist in
the evaluation of return on assets.
An institution experiencing negative earnings should assign a rating of Below Standard to
this area. An excellent or a very good rating is reserved for institutions that exhibit strong,
consistent earnings performance relative to supervisory standards and their peer groups and have
no material weakness disclosed by their primary supervisors.

Self-Assessment Worksheets A-74
_________________________________________________________________________
Earnings Performance Worksheet

Institution

Peer

Percentile

ROA:

%

%

%

Adjusted ROA:

%

%

%

Compare the institution's return on assets to the following benchmarks:

ROA Benchmarks:
Asset size
Rating

< $100
million

$100-$300
million

$300-$1,000
million

$1-$5
billion

>$5
billion

Excellent

1.15%

1.05%

0.95%

0.85%

0.75%

Very good

0.95

0.85

0.75

0.65

0.55

Adequate

0.75

0.65

0.55

0.45

0.35

Below
standard

<0.75

<0.65

<0.55

<0.45

<0.35

Earnings Performance Rating:

Self-Assessment Worksheets A-75
_________________________________________________________________________
Liquidity
An evaluation of liquidity involves a determination of the stability of the institution's
retail and wholesale funding sources as well as its ability to cover large unexpected funding
outflows. The assessment should include a review of the institution's historical and current
funding patterns, level of noncore funding, ability to access the money markets, and adequacy of
contingency liquidity plans. The following worksheet should facilitate the evaluation of the
institution’s dependency on non core funding sources.
An adequate rating may be assigned when liquidity measures are near peer group levels
and no material concerns have been disclosed by the primary supervisor. If undue reliance is
placed on noncore funding, a below standard rating is warranted. In addition, this rating may
apply when access to traditional funding sources declines because of market concerns regarding
the institution's condition. Excellent or very good ratings reflect institutions that have strong
funds management abilities, ready access to alternative funding sources, and adequate controls
for managing asset and liability risks.

Self-Assessment Worksheets A-76
_________________________________________________________________________
Liquidity Worksheet

Institution

Peer

Percentile

Net non core funding dependency
ratio:

Compare the institution's net non core funding dependency ratio with the data in the
following table.
Percentile

Rating

< 10th

Excellent

> 10th to 25th

Very good

> 25th to 50th

Adequate

> 50th

Below standard

Liquidity Rating:

Self-Assessment Worksheets A-77
_________________________________________________________________________
1.B.iii. Condition of Affiliated Institutions
The condition of the holding company and related affiliates must be considered in the
analysis of the institution's condition. In the evaluation of the condition of an institution's parent
company and affiliates, emphasis should be placed on the most recent supervisory ratings of the
affiliated institutions. It is recognized that management may not have the information needed for
assessing the condition of affiliated institutions. In such situations, management should confer
with the financial officers of the holding company.
The condition of the parent company or affiliated institutions will have either a neutral or
negative impact on the institution completing the assessment. If the parent company and related
affiliates are in satisfactory condition, no further adjustment needs to be made to the results of
the institution's self-assessment. Such findings will normally be supported by evidence that the
holding company serves as a source of strength to the institution; that is, it is willing and able to
provide capital contributions or other managerial and financial support to the institution.
The creditworthiness rating of an institution would be adjusted to below standard if the
condition of one or more of the commonly controlled institutions was deemed marginal or
unsatisfactory by the primary supervisor and the institution or institutions represent a material
position of the organization's consolidated assets or materially affect the organization's
consolidated operations. This situation may arise when a supervisory agency discloses a material
operating or financial weakness within the parent company or affiliated institutions that pose
significant risk to the institution. When such situations arise, the institution will not qualify for a
positive net debit cap.
•

If the supervisory rating of affiliates is marginal or unsatisfactory, the assigned rating
is negative.

•

If the supervisory rating of affiliates is fair or better, the assigned rating is neutral and
will not result in an upgrade or downgrade of the other factors.

Condition of Affiliates Rating:

Self-Assessment Worksheets A-78
_________________________________________________________________________
1.B.iv. Integrating the Three Factors
In integrating the three factors (capital adequacy, key performance measures, and the
condition of affiliated institutions) into a single assessment, institutions should use table A-2. In
general, the rating assigned to key performance measures will not exceed the lowest of the
ratings for the three measures. Similarly, the ratings assigned to creditworthiness should not
normally exceed the ratings of any of the three factors. In general, because the factors are
interrelated, the ratings of the factors should correspond closely to the overall creditworthiness
rating. For example, an institution that has one of the key performance measures rated below
standard will be expected to have overall creditworthiness rated below standard. Usually, poor
asset quality or operating losses will reduce capital to levels associated with a below standard
rating and, as a result, the overall creditworthiness rating should be assigned accordingly. In
situations in which an institution's capital ratios were below the regulatory standard but the rating
for capital adequacy was adjusted upward based on other factors, the overall creditworthiness
rating assigned should not be greater than adequate.
In addition, the overall rating for creditworthiness should be adjusted to reflect factors
that could have a material impact on the institution's financial condition. Other factors that may
contribute to the assignment of the overall rating might include the following:
•

Major changes in the institution's management

•

Material prospective losses or recoveries

•

Depressed or materially improved economic conditions in the
institution's primary operating location

•

Political developments in foreign countries where the institution has considerable
interests.

If the table A-2 indicates an overall creditworthiness rating of below standard, the
institution does not qualify for a positive daylight overdraft cap and need not complete the
remainder of the assessment.

Self-Assessment Worksheets A-79
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Table A-2
Creditworthiness Self-Assessment Summary
PRIMARY MEASURE
CAPITAL ADEQUACY ASSESSMENT:
KEY PERFORMANCE MEASURES
ASSET QUALITY ASSESSMENT:
EARNINGS STRENGTH ASSESSMENT:
LIQUIDITY ASSESSMENT:
KEY PERFORMANCE MEASURES RATING:*
CONDITION OF AFFILIATES ASSESSMENT:
* (Equals the lowest of the ratings for the three performance measures.)

Capital
adequacy

Key
performance
measures

Condition of
affiliates

Overall
creditworthiness

Well capitalized

Excellent

Neutral

Excellent

Adequately capitalized

Excellent

Neutral

Very good

Well capitalized

Very good

Neutral

Very good

Adequately capitalized

Very good

Neutral

Very good

Well capitalized

Adequate

Neutral

Adequate

Adequately capitalized

Adequate

Neutral

Adequate

Undercapitalized

Any rating

Any rating

Below standard

Significantly
undercapitalized

Any rating

Any rating

Below standard

Critically undercapitalized

Any rating

Any rating

Below standard

Any rating

Below
standard

Any rating

Below standard

Any rating

Any rating

Negative

Below standard

Overall Creditworthiness Rating:

Self-Assessment Worksheets A-80
_________________________________________________________________________
2. Assessment of Intraday Funds Management and Control
The purpose of the analysis of intraday funds management and control is to assess an
institution's ability to fund its settlement obligations daily across all payment systems in which
the institution participates. The analysis should include input from personnel in the funds
management, credit, and operations areas and should involve a review of payment flows activity
over time. The Payment Flows Worksheet (table A-3) is provided as a model to assist
institutions in analyzing their intraday payment activity. To the extent that an institution uses
other payment services that require large-dollar settlements, the worksheet should be expanded to
include them.
Yes
No
1.

Do data for the institution's daily payment flows show that the
institution is able to fund its positions on each payment system
in which it participates even if a major counterparty, customer,
correspondent, or participant in a clearing arrangement
defaults?
_____ _____

2.

Does the institution's system for monitoring its
positions on payment systems capture:
a.

b.

c.

At least 95 percent of the dollar value of all
payments processed at least every 15 minutes?

_____ _____

At least 80 percent of the dollar value of all
payments processed at least every 30 minutes?

_____ _____

Less than 80 percent of the dollar value of all
payments less than every 30 minutes?

_____ _____

Rating of Intraday Funds Management and Control:
•

A strong rating is appropriate if the answers to questions 1 and 2a are yes.

•

A satisfactory rating is appropriate if the answers to questions 1 and 2b are yes.

•

An unsatisfactory rating results if the answer to question 1 is no or if the answer
to question 2c is yes.

Intraday Funds Management and Control Rating:

Self-Assessment Worksheets A-81
_________________________________________________________________________

Table A-3
Payment Flows Worksheet
(Daily average dollar value)
Payment type

$ paid

% of
total

$ rec'd

% of
total

A. Federal Reserve account
1. Fedwire
a. Funds
b. Book-entry securities
2. Checks
a. Through Federal Reserve
b. Through clearinghouses1
3. ACH transactions
a. Through Federal Reserve
i. Credit payments
ii. Debit payments
b. Through private ACH systems1
4. Currency and coin
5. Other
Subtotal - Federal Reserve account activity
B. Through correspondent accounts
1. Check transactions
2. Other transactions
C. Privately operated networks2
1. CHIPS
2. DTC
3. Other
Total
1

100%

100%

Daily average net settlement entry, net debit or net credit.
If Fedwire funds transfers are used to settle obligations of private clearing and settlement arrangements,
the value of those settlement transfers should be deducted from Fedwire funds transfer totals and entered in
the appropriate category.

2

Self-Assessment Worksheets A-82
_________________________________________________________________________
3. Assessment of Customer Credit Policies and Controls
Yes

No

3.A. Assessment of Credit Policies
1.

Have formal, written credit policies been developed that articulate
sound credit standards?

_____ _____

Do the credit policies address interday and intraday credit
extensions?

_____ _____

Have the credit policies been approved by the institution's board of
directors?

_____ _____

4.

Are the policies reviewed periodically?

_____ _____

5

Have the procedures been communicated to all employees charged
with executing them?

_____ _____

2.

3.

Rating of Credit Policies:
•

If the answers to questions 1 through 5 are yes, a satisfactory rating is appropriate.

•

If the answer to any of the preceding five questions is no, an unsatisfactory rating
should be assigned.

Self-Assessment Worksheets A-83
_________________________________________________________________________
3.B. Assessment of Customer, Correspondent, and Counterparty Creditworthiness
Yes
1.

2.

No

Have credit assessments of customers, correspondents, and
counterparties that result in the establishment of credit limits or
limits on the institution's exposure been performed within the last
12 months?

_____ _____

Do procedures ensure that significant changes in the financial
condition of customers, correspondents, and counterparties are
identified and considered in current credit limits?

_____ _____

Rating of Customer, Correspondent, and Counterparty Creditworthiness Assessments:
•

A satisfactory rating is appropriate if the answers to questions 1 and 2 are yes.

•

An unsatisfactory rating is appropriate if the answer to either question 1 or question 2
is no.

Self-Assessment Worksheets A-84
_________________________________________________________________________
3.C. Monitoring Customer and Counterparty Intraday Payment Activity
Yes
1.

a.

b.

c.

2.

b.

c.

4.

5.

Capture all significant transactions at least every 15
minutes?

_____ _____

Capture 80 percent of significant transactions at
least every 30 minutes?

_____ _____

Capture less than 80 percent of significant
transactions less than every 30 minutes?

_____ _____

If customers are required to pledge collateral for intraday
extensions of credit:
a.

3.

No

Do customer and counterparty monitoring systems

Do systems ensure that all intraday extensions of
credit are fully secured?

_____ _____

Do procedures ensure that collateral reasonably
reflects market values?

_____ _____

Do procedures ensure that only eligible collateral is
used to support intraday extensions of credit?

_____ _____

Do monitoring systems reject or pend transactions when credit
limits are breached or when collateral is insufficient?

_____ _____

Are such transactions only released for processing after approval
by a credit officer?

_____ _____

If the institution participates in large-dollar clearing and settlement
arrangements, is any transaction that would breach a bilateral
credit limit pended or rejected?

_____ _____

Self-Assessment Worksheets A-85
_________________________________________________________________________
Monitoring Customer and Counterparty Intraday Payment Activity-continued
Rating Customer Intraday Monitoring:
•

If the answers to question 1a and questions 2a through 5 are yes, a strong rating is
appropriate.

•

If the answers to question 1b and questions 2a through 5 are yes, a satisfactory rating
is appropriate.

•

If the answer to question 1c is yes or the answer to any of questions 2a through 5 is
no, the rating is unsatisfactory.

Self-Assessment Worksheets A-86
_________________________________________________________________________
3.D. Monitoring Customer Interday Payment Activity
Yes
1.

Do interday monitoring systems for ACH credit transactions
capture
a.

b.

c.

2.

3.

No

100 percent of the value of ACH credit transactions
originated by settlement date?

_____ _____

At least 80 percent of the value of ACH credit
transactions originated by settlement date?

_____ _____

Less than 80 percent of ACH credit transactions
originated by settlement date?

_____ _____

Do monitoring systems for ACH credit transactions pend or reject
transactions in real time that would cause limits (including
collateral) to be breached for customers that have been identified
by a credit assessment to be in weak financial condition?

_____ _____

Do monitoring systems track return item exposure (check and
ACH debit transactions) for financially weakened customers?

_____ _____

Rating Customer Interday Payment Activity:
•

A strong rating is appropriate if the answers to questions 1a, 2, and 3 are yes.

•

A satisfactory rating is appropriate if the answers to questions 1b, 2, and 3 are yes.

•

An unsatisfactory rating results if the answer to question 1c is yes or the answer to
question 2 or 3 is no.

Self-Assessment Worksheets A-87
_________________________________________________________________________
3.E. Overall Rating: Customer Credit Policies and Controls
The matrix below should be used to combine the ratings for the sections of this
component into an overall rating for the self-assessment.

Credit Policies

Customer &
counterparty
creditworthiness

Monitoring
intraday
payment activity

Monitoring
interday
payment
activity

Overall
customer credit
policies and
controls rating

Satisfactory

Satisfactory

Strong

Strong

Strong

Satisfactory

Satisfactory

Satisfactory

Strong

Satisfactory

Satisfactory

Satisfactory

Strong

Satisfactory

Satisfactory

Satisfactory

Satisfactory

Satisfactory

Satisfactory

Satisfactory

Unsatisfactory

Any rating

Any rating

Any rating

Unsatisfactory

Any rating

Unsatisfactory

Any rating

Any rating

Unsatisfactory

Any rating

Any rating

Unsatisfactory

Any rating

Unsatisfactory

Any rating

Any rating

Any rating

Unsatisfactory

Unsatisfactory

Overall Customer Credit Policies and Controls Rating:

Self-Assessment Worksheets A-88
_________________________________________________________________________
4. Assessment of Operating Controls and Contingency Procedures
Yes

No

4. A. Internal Operating Controls
1.

Are controls in place to prevent the unauthorized initiation
of a transaction or the unauthorized payment of a transaction?

_____ _____

Areas that should be considered in answering this question include the following:
•

Are appropriate controls (for example, dialback, encryption, access
cards) used for protecting sensitive data when dial-in mechanisms are
used?

•

Does the system software provide for implementation and enforcement
of the data access rules and provide audit trails of all system access?

•

Are user IDs or terminals shut down after a predetermined number of
unsuccessful attempts to access the system?

•

Are confidential passwords used and do they provide the basis for
individual accountability or system use?

•

Are password administration procedures defined and followed (for
example, proper authorization of each new user, password suspension
if user terminated, and so on)?

2.

Are requests for off-line payment processing authenticated before
transactions are processed?

_____ _____

Are payment application programs logically secure and is update
access restricted to authorized change management software?

_____ _____

3.

Areas that should be considered in answering this question include the following:
•

Do controls exist that prevent unauthorized access to production data
files, program libraries, and system libraries?

Self-Assessment Worksheets A-89
_________________________________________________________________________
Internal Operating Controls - continued
•

4.

Are password files, authorization tables, communications software, and key
application programs stored in protected areas or otherwise protected from read and
write access?
Are steps taken to ensure the honesty and integrity of all involved
staff members?
_____ _____

Rating Internal Operating Controls:
•

If the answers to questions 1 through 4 are yes, a satisfactory rating is appropriate.

•

If the answer to one or more of questions 1 through 4 is no, an unsatisfactory rating
is appropriate.

Internal Operating Controls Rating:

Self-Assessment Worksheets A-90
_________________________________________________________________________
4.B. Contingency Procedures
Yes
1.

Has senior management worked with automation management
to establish a contingency plan?

No

_____ _____

Areas that should be considered in answering this question include the following:
•

Does the contingency plan include participation from all relevant
functional areas within the organization?

•

Does the contingency plan incorporate a detailed notification
procedure specifying who should be notified of emergencies?

•

Does the plan categorize and provide specific procedures for different
disasters?

2.

3.

4.

Does the plan address moving to an off-site facility or
have arrangements been made with a third-party for the
continuation of vital operations during an outage?

_____ _____

Have backup considerations such as contingency site selection,
contingency site hardware (computers, peripherals, terminals), and
contingency site software (compatibility, storage, testing) been
addressed?

_____ _____

Is the contingency plan periodically tested and does testing occur
at least annually?

_____ _____

Rating Contingency Procedures:
•

A satisfactory rating is appropriate if the answers to questions 1 through 4 are yes.

•

An unsatisfactory rating is the result if the answer to any of the four preceding
questions is no.

Contingency Procedures Rating:

Self-Assessment Worksheets A-91
_________________________________________________________________________
4.C. Overall Rating: Operating Controls and Contingency Procedures
If the rating for either internal operating controls or contingency procedures is
unsatisfactory, then an unsatisfactory rating results for this overall component. Otherwise, the
rating is satisfactory.

Operating Controls and Contingency Procedures Rating:

Self-Assessment Worksheets A-92
_________________________________________________________________________
5. Combining the Four Components
The individual component evaluations should be combined into an overall assessment
using table A-4 below.
Table A-4
Combined Assessment of Cap Category

Creditworthiness

Intraday
funds
management
& control

Customer
credit
policies &
controls

Operating
controls &
contingency
procedures

Overall
assessment
(cap category)

Excellent

Strong

Strong

Satisfactory

High

Excellent

Strong

Satisfactory

Satisfactory

Above average

Excellent

Satisfactory

Strong

Satisfactory

Above average

Excellent

Satisfactory

Satisfactory

Satisfactory

Above average

Very good

Strong

Strong

Satisfactory

Above average

Very good

Strong

Satisfactory

Satisfactory

Average

Very good

Satisfactory

Strong

Satisfactory

Average

Very good

Satisfactory

Satisfactory

Satisfactory

Average

Adequate

Strong

Strong

Satisfactory

Average

Adequate

Strong

Satisfactory

Satisfactory

Average

Adequate

Satisfactory

Strong

Satisfactory

Average

Adequate

Satisfactory

Satisfactory

Satisfactory

Average

Below standard

Any rating

Any rating

Any rating

Zero

Any rating

Unsatisfactory

Any rating

Any rating

Zero

Any rating

Any rating

Unsatisfactory

Any rating

Zero

Any rating

Any rating

Any rating

Unsatisfactory

Zero

Overall Self-Assessment Rating:

Sample Letters and Resolutions B-93
_________________________________________________________________________
Appendix B: Sample Letters and Resolutions
The sample letters and resolutions included in this appendix are intended for
institutions to use as models in complying with the Federal Reserve's PSR policy.
The de minimis cap resolution should be used by those institutions that did not conduct a
self-assessment but that require greater use of intraday credit than permitted under the exempt
cap category. The self-assessment resolution is required for those institutions that have
completed a self-assessment and intend to adopt an average, above average, or high cap category.
The maximum daylight overdraft capacity resolution should be completed by institutions that
have been approved by their Reserve Bank for collateralized daylight overdraft capacity above
their net debit cap. These cap resolutions are discussed further in section II of this manual.
In the resolution that is adopted by the board of directors, the words or phrases that
appear in parentheses in the following sample resolutions should be replaced with
appropriate text. In some cases, the options available are listed. When completing the selfassessment resolution, note the blank spaces shown to the left of the four components of the
self-assessment and the overall assessment rating. The appropriate values for these spaces
are to be selected from the following options:
Assessment Component

Rating options

Creditworthiness

Excellent
Very good
Adequate
Below standard

Intraday funds management
and control

Strong
Satisfactory
Unsatisfactory

Customer credit policies
and controls

Strong
Satisfactory
Unsatisfactory

Sample Letters and Resolutions B-94
_________________________________________________________________________
Operating controls and
contingency procedures

Satisfactory
Unsatisfactory

Overall assessment (Cap category)

High
Above average
Average
Zero cap

The rating assigned must be supported by information in an institution's self-assessment
file. For valid combinations of the ratings and the overall assessment, consult section VII of this
manual.

Sample Letters and Resolutions B-95
_________________________________________________________________________
Model Resolution 1
De Minimis Cap
I hereby certify that the following resolution was duly adopted at a meeting of the (type
of governing body/board of directors) of the (official name of institution) (the “Institution”),
duly authorized and existing under the laws of (state/United States) , which meeting was duly
called and held on the
day of
, 20 , and that those resolutions are now in full force and
effect and are not in conflict with any provisions in the certificate of incorporation, statutes, or
bylaws of the Institution.
WHEREAS, the Board of Governors of the Federal Reserve System has announced a
policy of reducing risks on payment systems that requires each depository institution that incurs
daylight overdrafts in its Federal Reserve account to adopt a net debit cap category; and
WHEREAS, this Institution desires to comply with the Federal Reserve's policy; and
WHEREAS, the board of directors has this day met and considered the report submitted
by management that addresses how the Institution plans to comply with the Federal Reserve's
policy and that makes recommendations regarding a net debit cap category,
NOW, THEREFORE, be it resolved that the board of directors hereby adopts the de
minimis cap as its net debit cap category.
RESOLVED, that these resolutions and all the powers and authorizations hereby granted
or confirmed shall continue in full force and effect until written notice of their revocation shall
have been given to and received by the Reserve Bank or for one year, whichever occurs earlier.
IN WITNESS HEREOF, I, the undersigned,
Institution, have hereunto subscribed my name.

(Signature of Secretary to the Board of Directors)
(Name of Depository Institution)
(Address)
(City, State, and Zip)
(Date)
(ABA Routing Number)

(Cashier/Comptroller/Secretary)

of the

Sample Letters and Resolutions B-96
_________________________________________________________________________
Model Resolution 2
Self-Assessment Cap
I hereby certify that the following resolution was duly adopted at a meeting of the (type
of governing body/board of directors) of the (official name of institution) (the “Institution”),
duly authorized and existing under the laws of (state/United States) , which meeting was duly
called and held on the
day of
, 20 , and that those resolutions are now in full force and
effect and are not in conflict with any provisions in the certificate of incorporation, statutes, or
bylaws of the Institution.
WHEREAS, the Board of Governors of the Federal Reserve System has announced a
policy of reducing risks on payment systems that requires each depository institution that incurs
daylight overdrafts in its Federal Reserve account to adopt a net debit cap category; and
WHEREAS, this Institution desires to comply with the Federal Reserve's policy; and
WHEREAS, the board of directors has this day met and considered the report submitted
by management that assesses the Institution's creditworthiness, intraday funds management and
controls, customer credit policies and controls, and operating controls and contingency
procedures, in accordance with the Federal Reserve's guidelines, and that makes
recommendations regarding self-assessment ratings, an overall self-assessment, and a net debit
cap category,
NOW, THEREFORE, be it resolved that the board of directors hereby adopts the
following self-assessment ratings and net debit cap category:
Creditworthiness
__________________
Intraday funds management and control
__________________
Customer credit policies and controls
__________________
Operating controls and contingency procedures
__________________
Overall assessment
__________________
Daylight overdraft cap category

(High, Above average, Average)

RESOLVED, that these resolutions and all the powers and authorizations hereby granted
or confirmed shall continue in full force and effect until written notice of their revocation shall
have been given to and received by the Reserve Bank or for one year, whichever occurs earlier.
IN WITNESS HEREOF, I, the undersigned, (Cashier/Comptroller/Secretary) of the
Institution, have hereunto subscribed my name.
(Signature of Secretary to the Board of Directors)
(Name of Depository Institution)
(Address)
(City, State, and Zip)
(Date)
(ABA Routing Number)

Sample Letters and Resolutions B-97
_________________________________________________________________________
Model Resolution 3
Maximum Daylight Overdraft Capacity
I hereby certify that the following resolution was duly adopted at a meeting of the (Type
of governing body/Board of directors) of the (Official name of institution) (the “Institution”),
duly authorized and existing under the laws of (State/United States) , which meeting was duly
called and held on the
day of
, 20 , and that those resolutions are now in full force and
effect and are not in conflict with any provisions in the certificate of incorporation, statutes, or
bylaws of the Institution.
WHEREAS, the Board of Governors of the Federal Reserve System has announced a
policy of reducing risks on payment systems that requires each depository institution that incurs
daylight overdrafts in its Federal Reserve account to adopt a net debit cap category, and, under
certain conditions, allows a depository institution to pledge eligible collateral for the purposes of
expanding intraday capacity beyond the net debit cap; and
WHEREAS, this Institution desires to comply with the Federal Reserve’s policy and
desires to expand its daylight overdraft capacity through the pledging of collateral; and
WHEREAS, the board of directors hereby has this day met and considered the report
submitted by management that assesses the Institution’s creditworthiness, intraday funds
management and controls, customer credit policies and controls, and operating controls and
contingency procedures, in accordance with the Federal Reserve’s guidelines; recommends selfassessment ratings, an overall self-assessment, and a net debit cap category; and assesses the
reasons and purposes for and recommends additional daylight overdraft capacity beyond the net
debit cap level, subject to the approval of the Federal Reserve Bank of ______________;
NOW, THEREFORE, be it resolved that the board of directors hereby adopts the
following self-assessment ratings and net debit cap category:
Creditworthiness

__________________

Intraday funds management and control

__________________

Customer credit policies and controls

__________________

Operating controls and contingency procedures

__________________

Overall assessment

__________________

Daylight overdraft cap category

(High, Above average, Average)

AND, be it further resolved that the Board of Directors authorizes a maximum daylight
overdraft capacity limit of $__________ and agrees that any intraday credit use beyond the net
debit cap level and up to the maximum daylight overdraft capacity limit must be collateralized

Sample Letters and Resolutions B-98
_________________________________________________________________________
and agrees to pledge collateral acceptable to the Federal Reserve Bank of ______________ in
form to support such increased usage. 117
RESOLVED, that these resolutions and all the powers and authorizations hereby granted
or confirmed shall continue in full force and effect until written notice of their revocation shall
have been given to and received by the Reserve Bank or for one year, whichever occurs earlier.
IN WITNESS HEREOF, I, the undersigned,
Institution, have hereunto subscribed my name.

(Cashier/Comptroller/Secretary)

of the

(Signature of Secretary to the Board of Directors)
(Name of Depository Institution)
(Address)
(City, State, and Zip)
(Date)
(ABA Routing Number)

117

The Reserve Banks may accept securities in transit on the Fedwire book-entry securities system as collateral to
support an institution’s maximum daylight overdraft capacity level. “Securities in transit” refers to book-entry
securities transferred over the National Book-Entry System that have been purchased by a depository institution but
not yet paid for and owned by the institution’s customers. The pledging of securities in transit requires the institution
to keep records sufficient to demonstrate its continuing compliance with its obligations under the PSR policy. The
institution shall supply biweekly reports to the Reserve Bank showing the values, at specified intervals, for the loan
value of the aggregate amount of collateral pledged, the aggregate amount of the extensions of credit, and the
amount of the Fedwire securities overdraft as reflected on its books.

Sample Letters and Resolutions B-99
_________________________________________________________________________
Model Letter 1
Nonbank and Industrial Bank Certification Letter
Section 225.52(b)(2) of Federal Reserve Regulation Y prohibits nonbank banks and
industrial banks from incurring an overdraft on behalf of, or by, an affiliate at a Federal Reserve
Bank except under certain conditions. An affiliate is any company that controls an institution, is
controlled by an institution, or under common control with an institution.
Because (Official name of institution ) does not currently have any accounts for affiliates,
I hereby certify that any overdrafts incurred by our institution would not be in violation of
section 225.52 of Regulation Y. I further certify that the Federal Reserve will be notified should
the status regarding affiliate accounts change. This certification will be updated annually.
__________________________________
(Authorized Signature)
_________________________________
(Name)
__________________________________
(Title)
__________________________________
(Telephone Number)

Sample Letters and Resolutions B-100
_________________________________________________________________________
Model Letter 2
Foreign Bank Family Cap Allocation Letter

(Address to daylight overdraft contact at
Administrative Reserve Bank)

This is to notify you that (Official name of institution) allocates a portion of its net debit
cap of (U.S. dollar amount) to its branch(es) or agency(ies) in the Federal Reserve Districts listed
below. No explicit allocation is made to the bank's office in this District, because it is our
understanding that any part of our cap not allocated to offices in other Districts will
automatically be allocated to our office in this District.
Federal Reserve District

Cap Allocation (US $)

_______________

_____________

_______________

_____________

_______________

_____________

__________________________________
(Authorized Signature)

__________________________________
(Name)

__________________________________
(Title)

__________________________________
(Telephone Number)

Capital Measures C-101
_________________________________________________________________________
Appendix C: Capital Measures
This appendix provides information, by type of institution, on capital measures used
for daylight overdraft cap and fee calculation. In most cases, capital information is submitted
to the primary regulator or supervisor using specific forms and reports, which are indicated
below.
1. Most U.S. banks, including
•
•
•
•
•
•
•

U.S.-chartered commercial banks
Nonbank banks
Bankers' banks
Industrial banks
Federally insured mutual savings banks
Federal savings banks
FDIC-insured cooperative banks.

Risk-based capital (that is, Tier 1 plus Tier 2 capital) for these institutions is
calculated from data reported on the Federal Financial Institutions Examination
Council (FFIEC) forms 031-034. For most banks, Tier 1 capital will equal common
stockholders' equity capital less goodwill and other disallowed intangible assets, and
Tier 2 capital will equal the allowable portion of the allowance for loan and lease
losses and is further limited to 100 percent of Tier 1 capital. Please refer to the
instructions for FFIEC forms 031-034, schedule RC-R for a discussion of Tier 1 and
Tier 2 capital.
Total Risk-Based Capital (line 21) (RCFD 3792).
2. Certain savings institutions, including
•
•
•

Insured savings and loan associations
Uninsured savings and loan associations that are on Savings Association
Insurance Fund (SAIF) files
SAIF-insured cooperative banks.

These institutions report capital data on the Thrift Financial Report, schedule CCR
(Consolidated Capital Requirement):
Total Risk-Based Capital (line 39) (SVGL 5314).

Capital Measures C-102
_________________________________________________________________________
3. Other savings institutions, including
•
•

Uninsured savings and loan associations that are not on Office of Thrift Supervision
files
Mutual savings banks (state or privately insured).

A Report of Condition is not filed by these institutions. Reserve Bank staff obtains capital
information directly from these institutions for daylight overdraft cap calculation
purposes.
4. Credit unions:
•
•

Federally insured credit unions
Credit unions not federally insured that are on National Credit Union Association
(NCUA) files.

These institutions report capital data on the NCUA Financial Statistical Report (NCUA
5300):
Total Net Worth (line 997) (CUSA3210).
5. Corporate credit unions:
These institutions report capital data on the NCUA Financial Statistical Report (NCUA
5310, refer to Schedule C-1 for capital data):
Total Capital Dollars (line 1.n) (CUCPC858).
6. U.S. Branches and Agencies of Foreign Banks:
These institutions report capital data on the Annual Daylight Overdraft Capital Report for
U.S. Branches and Agencies of Foreign Banks (FR 2225):
Daylight overdraft capital base (line 3)
or
Report of Assets and Liabilities for U.S. Branches and Agencies of Foreign Banks
(FFIEC 002) Schedule RAL:
Net due to related depository institutions (Item 5.a., Column A (RCFD 2944)).
See section V for further information on capital measures for U.S. branches and agencies
of FBOs.

Glossary 103
_________________________________________________________________________
Glossary
Above-average cap—The cap category that permits an institution to incur daylight overdrafts on
a single day up to 1.875 times its capital measure.
Account Balance Monitoring System (ABMS)—The Reserve Bank application that provides
institutions that have an electronic connection to Fedwire with access to real-time account
balance and collateral information. ABMS also allows Reserve Banks to monitor institutions’
account balances and payment activity on a real-time basis and reject or intercept certain
transactions. Also see real-time monitoring.
Account Management Information (AMI)—A web-based application that provides institutions
with real-time access to their intraday account and collateral balances, detailed transaction
information, reporting, and inquiry capabilities. For further information refer to
http://www.frbservices.org/serviceofferings/account/ami.html.
Administrative Reserve Bank (ARB)—The Reserve Bank responsible for the administration of
Federal Reserve credit, reserves, and risk management policies for a given depository institution
or other legal entity.
Affiliate—Any company that controls, is controlled by, or is under common control with, a bank
or nonbank bank (according to Federal Reserve Regulation Y).
Agreement corporation—A corporate subsidiary of a federal- or state-chartered bank having an
agreement or undertaking with the Board of Governors, under section 25 of the Federal Reserve
Act, to engage in international banking and investments.
ACH—Automated Clearing House. An electronic batch processing service used to disburse or
collect funds.
Average cap—The cap category that permits an institution to incur daylight overdrafts on a
single day up to 1.125 times its capital measure.
Average daily daylight overdraft—The amount resulting from the division of the sum of an
institution’s negative Federal Reserve account balances at the end of each minute of the
scheduled Fedwire operating day (with positive balances set to zero) by the total number of
minutes in the scheduled Fedwire operating day.
Bank holding company (BHC)—Any company that has direct or indirect control of a bank.
The Bank Holding Company Act provides a federal framework for the supervision and
regulation of companies that own or control a bank. (Pub. L. No. 100-86, 101 Stat. 552,
available at http://www.fdic.gov/regulations/laws/rules/6000-100.html)
Bankers’ bank—An institution organized and chartered solely to do business with other
financial institutions, and primarily owned by the financial institutions that it services. The term

Glossary 104
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includes corporate credit unions. A bankers’ bank is a depository institution that is not required
to maintain reserves under the Board’s Regulation D (12 CFR 204). Bankers’ banks do not take
deposits or make loans to the public and are not eligible for discount window access unless they
waive their exemption from reserve requirements.
Board of directors’ resolution—A statement of intention to follow a course of action that is
approved by a majority vote of a quorum of the board of directors of a corporation. In the context
of the PSR policy, a board of directors’ resolution would be adopted to convey approval to a
Reserve Bank of a net debit cap category or max cap.
Board of Governors (Board)—The Board of Governors of the Federal Reserve System.
Book-entry securities transfer—Generally, an electronic transfer of Fedwire-eligible securities
(such as securities issued by the U.S. Treasury or a government agency) over the Fedwire
Securities Service.
Borrower-in-Custody (BIC) Arrangement —An agreement under which the pledging
institution retains possession of assets being pledged as collateral but must designate the BIC
collateral as being pledged to the Reserve Bank.
Cap—See Net debit cap.
Cap breach—An event in which the negative end-of-minute balance in an institution’s Federal
Reserve account on any day exceeds its net debit cap.
Cap category—An institution’s category or class for purposes of determining its daylight
overdraft limit, or net debit cap. There are six cap categories: zero, exempt-from-filing, de
minimis, average, above average, and high. The average, above-average, and high cap
categories are referred to as the self-assessed net debit caps. DIs with self-assessed caps may be
eligible to apply for maximum daylight overdraft capacity (max cap).
Cap multiple—The factor associated with each cap category that is applied to capital for the
purpose of calculating the net debit cap.
Capital measure—For depository institutions chartered in the United States, net debit caps are
multiples of “qualifying” or similar capital measures that consist of those capital instruments that
can be used to satisfy risk-based capital standards, as set forth in the capital adequacy guidelines
of the federal financial regulatory agencies. The U.S. capital equivalency measure for branches
and agencies of FBOs is based on their strength of support assessment ranking and financial
holding company status.

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Collateral available for daylight overdraft purposes—An institution’s value of Federal
Reserve collateral pledged less any outstanding loan advances. When assessing fees, the Federal
Reserve compares, ex post, an institution’s end-of-minute value of collateral available for
daylight overdraft purposes with the institution’s end-of-minute daylight overdraft to determine
whether and how much of that minute’s overdraft was collateralized. Institutions with access to
ABMS or to AMI may view their collateral available for daylight overdraft purposes in nearreal-time intraday.
Collateral Management System—The Federal Reserve’s collateral inventory tracking and
transaction processing application that is used to record collateral pledged for discount window,
payment system risk, and Treasury programs.
Collateral value— The amount of credit that the Federal Reserve will extend against the
pledged asset. Collateral value is calculated by multiplying a pledged asset’s observed market
price or estimated fair value by the margin assigned to the asset by the Federal Reserve.
Collateralized capacity – The additional daylight overdraft capacity available to an institution
with an approved max cap through the pledge of collateral. The collateralized capacity available
to such institution is calculated as the difference between the approved max cap and the
institution’s net debit cap. An institution with an approved max cap may, at any time, pledge
collateral to use the collateralized capacity in part or in full.
Collateralized daylight overdraft – An institution’s end-of-minute daylight overdraft if the
institution’s end-of-minute value of collateral available for daylight overdraft purposes meets or
exceeds the value of its daylight overdraft for that minute. See collateral available for daylight
overdraft purposes.
Competitive Equality Banking Act (CEBA)—A federal law enacted August 10, 1987, that,
among other things, prohibits nonbank banks and industrial banks from incurring daylight
overdrafts in their Federal Reserve accounts on behalf of affiliates.
Corporate credit unions—See Bankers’ bank.
Daylight overdraft—A negative balance in an institution’s Federal Reserve account at any time
during the Fedwire operating day.
Depository Trust Company (DTC)—A limited-purpose trust company that acts as the central
securities depository for most publicly traded equity securities and many fixed-income securities
in the U.S. market. Each Reserve Bank has established a pledge account with DTC through
which institutions may pledge securities for discount window and PSR purposes.
De minimis cap—The cap category that permits an institution to incur daylight overdrafts up to
a net debit cap equal to 40 percent of its capital measure.

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Edge Act corporation—A corporate subsidiary of a domestic or an FBO, established under
section 25(a) of the Federal Reserve Act to engage in international banking and investments.
Effective daily rate—The annual rate charged for daylight overdrafts divided by 360 days,
adjusted for the portion of the day during which the Fedwire funds transfer system is officially
operating.
End-of-minute balance—The balance in an institution’s Federal Reserve account at the end of
each minute for purposes of daylight overdraft reporting and pricing.
Exempt-from-filing cap—The cap category that permits an institution to incur daylight
overdrafts up to a cap equal to the lesser of $10 million or 20 percent of its capital measure.
Fedwire—The Federal Reserve funds and book-entry government securities transfer system.
Fedwire Securities Service (FSS) —A system that provides safekeeping, transfer, and deliveryversus-payment settlement services for securities maintained on the books of the Reserve Banks.
FSS maintains in electronic form all marketable U.S. Treasury securities, as well as many federal
government agency, government-sponsored enterprise (GSE), and certain international
organizations securities. Institutions may pledge eligible FSS securities to their Reserve Bank
for discount window and PSR purposes.
Fee waiver—Institutions that incur fees for a two-week reserve maintenance period under $150
will not be assessed any fees, and institutions incurring fees for a two-week reserve maintenance
period over $150 will have their gross fees reduced by $150. The fee waiver is not available for
institutions that do not have regular access to the discount window.
Field warehouse—An arrangement whereby collateral pledged to the Reserve Bank is held on
the pledging institution’s premises under the Reserve Bank’s exclusive custody and control.
Financial holding company (FHC)—The Gramm-Leach-Bliley Act defines a financial holding
company as a bank holding company that meets certain eligibility requirements. In order for a
bank holding company to become a financial holding company and be eligible to engage in the
activities authorized under the Gramm-Leach-Bliley Act, the Act requires that all depository
institutions controlled by the bank holding company be well capitalized and well managed (12
U.S.C. 1841(p)). With regard to an FBO that operates a branch or agency or owns or controls a
commercial lending company in the United States, the Act requires the Board to apply
comparable capital and management standards that give due regard to the principle of national
treatment and equality of competitive opportunity (12 U.S.C. 1843(l)).
Foreign banking organization (FBO)— (1) A foreign bank, as defined in section 1(b)(7) of the
International Banking Act of 1978 (12 U.S.C. 3101(7)), that (a) operates a branch, agency, or
commercial lending company subsidiary in the United States, (b) controls a bank in the United
States; or (c) controls an Edge corporation acquired after March 5, 1987, and (2) any company of
which the foreign bank is a subsidiary.

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Fully collateralized cap breach waiver— An institution with a self-assessed or de minimis net
debit cap may exceed its net debit cap without violating the policy if the institution has fully
collateralized all cap breaches on a given day. Under the waiver, institutions may fully
collateralize up to two cap breaches in two consecutive reserve maintenance periods (four
weeks).
Government-sponsored enterprises (GSEs)— Corporations chartered by Congress to perform
certain financial market functions deemed to be in the public interest. These entities include
Fannie Mae, the Federal Home Loan Mortgage Corporation (Freddie Mac), entities of the
Federal Home Loan Bank (FHLB) System and the Farm Credit Bank (FCB) System, Federal
Agricultural Mortgage Corporation (Farmer Mac), the Financing Corporation, and the Resolution
Funding Corporation.
Gross overdraft charge—A daylight overdraft charge calculated, based on average overdrafts,
before being reduced by the fee waiver for eligible institutions.
High cap—The cap category that permits an institution to incur daylight overdrafts on a single
day up to 2.25 times its capital measure.
Industrial bank—An institution as defined in section 2(c)(2)(H) of the Bank Holding Company
Act. In general, an industrial bank is a state-chartered finance company that makes loans and
raises funds by selling investment certificates or investment shares to the public.
Industrial loan company (ILC)—An entity that is not a bank, as defined under the Bank
Holding Company Act (BHCA), and that does not accept certain types of demand deposits, has
less than $100 million in total assets, or has not undergone any change in control since the
enactment of CEBA. An ILC is also excluded from the definition of bank under the BHCA if it
does not “engage in any activity in which it was not lawfully engaged” before the enactment of
CEBA.
International organizations—The Federal Reserve acts as fiscal agent for certain international
organizations, the securities of which are Fedwire-eligible but are not obligations of, or fully
guaranteed as to principal and interest by, the United States. The international organizations
include the World Bank, the Inter-American Development Bank, the Asian Development Bank,
and the African Development Bank.
In-transit securities—Book-entry securities transferred over the Fedwire Securities Service that
have been purchased by a depository institution but not yet paid for and owned by the
institution’s customers.
Limited-purpose trust company—For purposes of the PSR policy, a limited-purpose trust
company is a trust company that is a member of the Federal Reserve System but that does not
meet the definition of “depository institution” in section 19(b)(1)(A) of the Federal Reserve Act
(12 U.S.C. 461(b)(1)(A)).

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Liquidity—The ability to make payments as they become due in readily available funds.
Margin—A percentage applied to the observed market price or estimated fair market value of an
asset to mitigate the risk that the observed market price or estimated market value of an asset will
decline over time. The Federal Reserve’s margins are based on risk characteristics of the
pledged asset as well as the anticipated volatility of the fair market value of the pledged asset
over an estimated liquidation time frame.
Maximum daylight overdraft capacity—An institution’s net debit cap plus its collateralized
capacity. (See collateralized capacity.) Only institutions with self-assessed net debit caps are
eligible to request maximum daylight overdraft capacity from the Federal Reserve.
Net debit cap—The maximum dollar amount of collateralized and uncollateralized daylight
overdrafts an institution is permitted to incur in its Federal Reserve account at any point in the
day. The net debit cap is generally equal to an institution’s capital measure times the cap
multiple for its cap category.
Net debit position ––A negative intraday or interday balance in an account or a negative
position with an institution's counterparties in a private clearing and settlement arrangement.
Nonbank bank—In general, an institution that accepts deposits or makes commercial loans, but
does not engage in both activities. A nonbank bank is any institution that became a bank as a
result of the enactment of CEBA and was not controlled by a bank holding company on the day
before the CEBA enactment.
Overdraft—See daylight overdraft, overnight overdraft.
Overnight overdraft—A negative position in a Federal Reserve account at the Reserve Bank’s
close of business. Overnight overdrafts are subject to the overnight overdraft penalty fee. For
further information refer to http://www.federalreserve.gov/paymentsystems/oo_about.htm.
Posting rules—A schedule used for determining the timing of debits and credits to an
institution’s Federal Reserve account for various transactions processed by the Reserve Banks.
PSR policy—The Federal Reserve Policy on Payment System Risk. Part II of the policy is most
relevant for purposes of this Guide. For further information refer to
http://www.federalreserve.gov/paymentsystems/psr_policy.htm.
Real-time monitoring—The ABMS function that provides Reserve Banks with the ability to
monitor an institution’s Federal Reserve account balance as transactions occur throughout the
day and to reject or intercept outgoing funds transfers when they would cause an overdraft in an
institution’s Federal Reserve account.
Reserve maintenance period (RMP)—A two-week period beginning on a Thursday and ending
on a Wednesday over which most depository institutions must maintain required reserves and

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over which daylight overdrafts are monitored and charges may be assessed. Institutions that file
a quarterly FR 2900 deposit report have a seven-day reserve maintenance period.
Risk-based capital— The “qualifying” or similar capital measure used to satisfy risk-based
capital standards, as set forth in the capital adequacy guidelines of the federal financial
regulatory agencies. Generally, for domestic banks the relevant capital measure is
Tier I plus Tier II capital. Descriptions of capital measures, by type of institution, and related
regulatory reports can be found in appendix C.
Self-assessment—A process by which a depository institution assesses its own creditworthiness,
intraday funds management, operational controls, contingency procedures, and credit policies in
order to determine its appropriate cap category for daylight overdraft purposes.
Self-assessed cap—One of three cap categories for which institutions are required to complete a
self-assessment. The self-assessment cap categories are average, above average, or high.
Systemic risk—The risk that the failure of or a disruption to the functioning of a financial
market utility or a financial institution could create or increase the risk of significant liquidity or
credit problems spreading among financial institutions or markets and thereby threaten the
stability of the US financial system.
Third Party Custody Pledging Arrangements —An institution may designate a third party
custodian to provide collateral custody services. Third party custody arrangements involve an
institution (borrower), another institution that holds the assets to be pledged (custodian), and the
Reserve Bank (lender).
Treasury Tax and Loan (TT&L) — A program where institutions collect tax payments or
deposits on behalf of Treasury. Institutions must cover the funds with collateral and must pay
Treasury interest for use of the funds. Collateral pledged for this program is held in the TT&L
account, which is separate from an institution’s FR account.
Uncollateralized daylight overdraft – An institution’s end-of-minute daylight overdraft if the
institution’s end-of-minute value of collateral available for daylight overdraft purposes is less
than the value of its daylight overdraft for that minute. See collateral available for daylight
overdraft purposes.
U.S. capital equivalency—Capital measure applied to U.S. branches and agencies of FBOs for
purposes of calculating net debit caps and the deductible used to calculate daylight overdraft
charges.
Zero cap—The cap category associated with a cap multiple of zero and resulting in a net debit
cap of zero. An institution may voluntarily adopt this cap category, or a Reserve Bank may
assign a zero cap to certain institutions.