Self-assessed cap Non FBOs

Guide to the Federal Reserve’s Payment System Risk Policy
on Intraday Credit
Effective February 6, 2023

Federal Reserve System

This publication is available at
http://www.federalreserve.gov/paymentsystems/psr_about.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 (Uncollateralized Intraday Credit Capacity) ........................................9
B. Cap Categories...................................................................................................................10
1.
Zero ............................................................................................................................. 11
2.
Exempt-from-filing...................................................................................................... 11
3.
De minimis .................................................................................................................. 12
4.
Self-assessed ............................................................................................................... 12
C. Collateralized Intraday Credit Capacity (Max Cap).....................................................13
1.
General procedure ...................................................................................................... 13
2.
Streamlined procedure for certain foreign banking organizations (FBOs) ............... 14
3.
Determination of the max cap amount under general and streamlined procedures .. 15
4.
Collateral pledged for max cap purposes................................................................... 15
5.
Examples of Maximum Daylight Overdraft Capacity ................................................ 17
D. Role of an Institution’s Board of Directors .....................................................................18
E. Cap Resolutions .................................................................................................................19
F. Confidentiality of Cap Information .................................................................................20
III. Collateral ................................................................................................................................21
A. Collateral Eligibility..........................................................................................................22
B. Collateral Valuation ..........................................................................................................22
1.
Securities valuation .................................................................................................... 22
2.
Loan valuation ............................................................................................................ 22
3.
Collateral margins...................................................................................................... 23
C. Pledging Collateral ............................................................................................................23
1.
Fedwire Securities Service (FSS) ............................................................................... 24
2.
Depository Trust Company (DTC) ............................................................................. 24
3.
Third-Party Custody Pledging Arrangement ............................................................. 25
4.
Borrower-in-Custody of Collateral (BIC) Arrangement ............................................ 25
5.
Foreign Depositories .................................................................................................. 25
6.
Reserve Bank Custody ................................................................................................ 26
7.
In-transit Securities .................................................................................................... 26
D. Withdrawing Collateral ....................................................................................................27
1.
Fedwire Securities Service (FSS) ............................................................................... 27
2.
Depository Trust Company (DTC) ............................................................................. 27
3.
Custodians, BIC Arrangements, and Reserve Bank Custody ..................................... 27
4.
Foreign Depositories .................................................................................................. 27
E. Collateralized Daylight Overdrafts .................................................................................28
1.
Eligibility for zero-priced collateralized daylight overdrafts..................................... 28
2.
Collateral available for daylight overdraft purposes ................................................. 28
F. Reserve Bank PSR Collateral Requirements ..................................................................29
G. Collateral Monitoring .......................................................................................................30

ii
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1.
Intraday monitoring .................................................................................................... 30
2.
Ex post monitoring...................................................................................................... 31
IV. Daylight Overdraft Monitoring and Management.............................................................32
A. Daylight Overdraft Measurement ...................................................................................32
B. Monitoring Compliance with the PSR Policy .................................................................33
1.
Consequences of policy violations.............................................................................. 34
C. Real-time Monitoring and the Account Balance System (ABS) ...................................34
D. Ex Post Monitoring ...........................................................................................................36
V. Daylight Overdraft Fees .........................................................................................................37
A. Calculation of Daylight Overdraft Charges ...................................................................37
B. Example of Daylight Overdraft Charge Calculation .....................................................37
1.
Calculation of end-of-minute uncollateralized daylight overdraft ............................. 38
2.
Calculation of daily daylight overdraft charge .......................................................... 38
3.
Calculation of reserve maintenance period charge and application of fee waiver.... 38
C. Billing and Adjustments ...................................................................................................40
1.
Assessment of charges ................................................................................................ 40
D. Institutions Subject to Daylight Overdraft Penalty Fees ..............................................40
VI. Special Situations ...................................................................................................................42
A. U.S. Branches and Agencies of Foreign Banking Organizations ..................................42
1.
U.S. capital equivalency ............................................................................................. 42
2.
Allocation of caps ....................................................................................................... 43
B. Industrial Banks and Industrial Loan Companies Subject to the BHCA Exception .44
C. Institutions Subject to Daylight Overdraft Penalty Fees ..............................................45
1.
Edge Act and agreement corporations ....................................................................... 45
2.
Bankers’ banks ........................................................................................................... 46
3.
Limited-purpose trust companies ............................................................................... 46
4.
Government-sponsored enterprises (GSEs) and international organizations ........... 46
VII. Self-Assessment Procedures ................................................................................................47
A. Creditworthiness Component ..........................................................................................48
B. Intraday Funds Management and Control .....................................................................52
C. Customer Credit Policies and Controls...........................................................................54
D. Operating Controls and Contingency Procedures .........................................................58
E. Overall Self-Assessment Rating .......................................................................................61
Appendix A: Self-Assessment Worksheets .............................................................................62
Appendix B: Sample Letters and Resolutions ........................................................................96
Appendix C: Capital Measures ..............................................................................................104
Glossary ......................................................................................................................................106

Preface 1
_________________________________________________________________________
Prefaces
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 https://www.federalreserve.gov/paymentsystems/psr_relpolicies.htm.

Introduction 2
_________________________________________________________________________
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
modified its method of measuring daylight overdrafts to reflect better the timing of transactions
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 https://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
_________________________________________________________________________
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
processed and posted interest and redemption payments on securities issued by these entities by

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
_________________________________________________________________________
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,
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
13
14
15

All times noted in this document are in eastern time.
See 69 FR 69926, December 1, 2004.
“Fedwire” and “FedACH” are registered service marks of the Federal Reserve Banks. A complete list of marks
owned by the Federal Reserve Banks is available at https://frbservices.org/..
16
See 72 FR 2518, January 19, 2007.
17
See 73 FR 79109, December 24, 2008.
18
See 75 FR 60749, October 1, 2010.

Introduction 5
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In 2019, the Board adopted changes to the PSR policy that removed references to the
Strength of Support Assessment ranking and financial holding company status for FBOs and
adopted alternative methods for determining an FBO’s eligibility for a positive net debit cap, the
size of its net debit cap, and its eligibility to use the streamlined procedure to obtain maximum
daylight overdraft capacity. The changes became effective October 1, 2020. 19
In 2019, the Board also announced modifications to the Federal Reserve Banks' National
Settlement Service (NSS) and Fedwire Funds Service to support a third and later same-day ACH
processing and settlement window. 20 In conformance, effective on March 8, 2021, the formula
for calculating daylight overdraft fees was adjusted to reflect the move from the 21.5-hour to the
22-hour Fedwire Funds Service operating day. Finally, effective March 19, 2021, the PSR
policy was revised to (i) add a 6:00 p.m. ET posting time for settlement of commercial and
government same-day ACH transactions, including return items, and (ii) remove the existing
5:30 p.m. ET posting time for commercial and government same-day ACH return items, because
these return items will post at the new 6:00 p.m. ET posting time.
In 2022, the Board announced changes to part II that expanded the eligibility of
depository institutions to request collateralized intraday credit under the maximum daylight
overdraft capacity program while reducing administrative steps for requesting collateralized
intraday credit. Further, the Board clarified the eligibility standards for accessing
uncollateralized intraday credit from Reserve Banks and modified the impact of a holding
company's or affiliate's supervisory rating on an institution's eligibility to request
uncollateralized intraday credit capacity. 21
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. 22
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,
19
20
21
22

See 84 FR 12049, April 1, 2019. See also 85 FR 19077, April 6, 2020.
84 FR 71940, December 30, 2019. See also 85 FR 61747, September 30, 2020.
See 87 FR 75254, December 8, 2022.
For the Board’s long-standing objectives in the payment system, see “The Federal Reserve in the Payments
System,” September 2001, FRRS 9-1550.

Introduction 6
_________________________________________________________________________
and (3) establishing the policy conditions governing the provision of Federal Reserve
intraday credit to account holders. 23
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. 24
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
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.
23
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.
24
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 7
_________________________________________________________________________
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 may be obligated to cover the payment and bear any resulting
losses. The Federal Reserve’s exposure in such instances could be significant. 25
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
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.

25

Aggregate daylight overdraft data are available at http://www.federalreserve.gov/paymentsystems/psr_data.htm.

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. 26 In addition, the policy allows certain institutions to pledge collateral to the Federal
Reserve to access daylight overdraft capacity above their net debit caps. 27 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. 28

26
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.
27
Collateral eligibility and margins are the same for PSR policy purposes as for the discount window. See the
Federal Reserve Collateral Guidelines available at
https://www.frbdiscountwindow.org/pages/collateral/discount%20window%20margins%20and%20collateral%20gu
idelines for more information.
28
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.

Daylight Overdraft Capacity 9
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A. Net Debit Caps (Uncollateralized Intraday Credit Capacity)
An institution’s net debit cap refers to the maximum dollar amount of uncollateralized
daylight overdrafts that it can incur in its Federal Reserve account. An institution’s cap category
and its capital measure determine the dollar amount of its net debit cap. 29 An institution’s net
debit cap is calculated as its cap multiple times its capital measure:
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.
As indicated below, an institution’s eligibility to request a positive net debit cap depends on the
institution’s creditworthiness as determined by (i) the supervisory ratings of the institution and
any holding company or affiliates, and (ii) the institution’s Prompt Corrective Action (PCA)
designation (for domestic institutions) or FBO PSR capital category (for FBOs).

29
Information on capital measures for different types of institutions and related regulatory reports is provided in
Appendix C.

Daylight Overdraft Capacity 10
_________________________________________________________________________
Eligibility Criteria for Requesting a Positive Net Debit Cap
Supervisory rating 30
PCA designation/
FBO PSR capital
Marginal or
Strong
Satisfactory
Fair
category
Unsatisfactory
Well capitalized/
Eligible
Eligible
Eligible
Ineligible
Highly capitalized
(Zero net debit
cap)
Adequately capitalized/
Sufficiently capitalized

Eligible

Eligible

Eligible

Undercapitalized

May be eligible
subject to a full
assessment of
creditworthines
Ineligible
(Zero net debit
cap)

May be eligible
subject to a full
assessment of
creditworthiness
Ineligible
(Zero net debit
cap)

Ineligible
(Zero net
debit cap)

Ineligible
(Zero net debit
cap)
Ineligible
(Zero net debit
cap)

Ineligible
(Zero net
debit cap)

Ineligible
(Zero net debit
cap)

Significantly or critically
undercapitalized/
Intraday credit ineligible

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. An institution’s cap category is typically set for one year, but the Reserve
Banks will monitor the condition of all accountholders throughout the year to ensure that they
remain eligible for their respective caps. 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. Please note that zero, exempt30
Supervisory ratings, such as the Uniform Financial Institution Rating System (CAMELS) and the RFI Rating
System, are generally assigned on a scale from 1 to 5, with 1 being the strongest rating. Thus, a supervisory rating
of 1 is considered Strong, a rating of 2 is considered Satisfactory, a rating of 3 is considered Fair, a rating of 4 is
considered Marginal, and a rating of 5 is considered Unsatisfactory. An institution will not be eligible for
uncollateralized capacity if a supervisory agency assigns a Marginal or Unsatisfactory supervisory rating to the
institution. If an institution’s holding company has been assigned a Deficient-2 rating in any of the components of
the Large Financial Institution (LFI) rating system or an RFI rating of 4 or 5, the institution will not be eligible to
request the “above average” and “high” self-assessed cap categories but may be eligible for a lower cap category
Similarly, if an institution’s affiliates are assigned a Marginal or Unsatisfactory supervisory rating, the institution
will not be eligible to request the “above average” and “high” self-assessed cap categories but may be eligible for a
lower cap category. Reserve Banks will assign an institution a “zero” net debit cap if supervisory information about
the holding company and affiliated institutions reveals material operating or financial weaknesses that pose
significant risks to the institution.

Daylight Overdraft Capacity 11
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from-filing, or the de minimis cap categories may also find it helpful to review certain sections
of the self-assessment procedures, which are not included elsewhere in this Guide.
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.
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. 31 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.

31

The Reserve Bank may require U.S. branches and agencies of FBOs that are based in jurisdictions that have not
implemented capital standards substantially consistent with those established by the Basel Committee on Banking
Supervision to perform a full assessment of creditworthiness to determine whether the FBO meets reasonable safety
and soundness standards. U.S. branches and agencies of FBOs that are based in jurisdictions that have implemented
capital standards substantially consistent with those established by the Basel Committee on Banking Supervision
will not be required to complete an assessment of creditworthiness, but Reserve Banks will assess such an FBO’s
creditworthiness based on the FBO’s supervisory rating and its FBO PSR capital category.

Daylight Overdraft Capacity 12
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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.
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. 32 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. 33
Generally, if an institution with a de minimis cap exceeds its cap during a two-week reservemaintenance 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.
Details of the self-assessment process are provided in section VII and Appendix A of this Guide.
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.

32

The Reserve Bank will require U.S. branches and agencies of FBOs that are based in jurisdictions that have not
implemented capital standards substantially consistent with those established by the Basel Committee on Banking
Supervision to perform a full assessment of creditworthiness to determine whether the FBO meets reasonable safety
and soundness standards. U.S. branches and agencies of FBOs that are based in jurisdictions that have implemented
capital standards substantially consistent with those established by the Basel Committee on Banking Supervision
will not be required to complete an assessment of creditworthiness, but Reserve Banks will assess such an FBO’s
creditworthiness based on the FBO’s supervisory rating and the FBO PSR capital category.
33
Sample resolutions are provided in Appendix B.

Daylight Overdraft Capacity 13
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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.
C. Collateralized Intraday Credit Capacity (Max Cap)
The PSR policy recognizes that while net debit caps provide sufficient liquidity to most
institutions, some institutions may still experience intraday liquidity pressures. To relieve these
pressures, certain institutions may pledge collateral to their Reserve Banks to secure daylight
overdraft capacity in excess of their net debit caps, subject to Reserve Bank approval. As
indicated below, the net debit cap plus the additional capacity is referred to as the “maximum
daylight overdraft capacity” or “max cap.” Granting a max cap, or any extension of intraday
credit, to an institution is at the discretion of the Reserve Bank.
1. General procedure 34
An institution that wishes to expand its daylight overdraft capacity by pledging
collateral should consult with its administrative Reserve Bank. A domestic institution is
eligible to request collateralized intraday credit if its PCA designation is
“undercapitalized,” “adequately capitalized,” or “well capitalized.” Similarly, an FBO is
eligible to request collateralized intraday credit if its FBO PSR capital category is
“undercapitalized,” “sufficiently capitalized,” or “highly capitalized.” Provided that it
meets these capitalization requirements, an institution may be eligible to request
collateralized capacity even if the institution is not eligible to adopt a positive net debit
cap. Granting a max cap, or any extension of intraday credit, to an institution is at the
discretion of the
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 financial and supervisory information.
If an institution is requesting collateralized capacity for the first time, it must submit a
resolution from its board of directors indicating its board’s approval of the requested max cap

34
General procedure applies to all institutions, except FBOs obtaining a max cap under the streamlined procedure,
described further in this section.

Daylight Overdraft Capacity 14
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(Appendix B provides sample resolutions). 35 Increases to collateralized capacity previously
approved by Reserve Banks will also require a board of directors resolution. 36
In most cases, an institution will not have to provide to a Reserve Bank a business case
justifying its request for collateralized capacity. However, an institution requested a max cap
under the general procedure must provide a business-case justification if:
•
•

the institution requests a max cap in excess of its capital measure multiplied by 2.25; or
the administrative Reserve Bank exercises discretion to require that the institution submit
a business-case justification due to recent developments in the institution's condition.

If approved by a Reserve Bank, in most cases, the max cap will remain in place without
the need for further action by the institution. However, Reserve Banks have the discretion to
adjust a previously-approved max cap amount. The Reserve Bank will monitor the institution to
ensure that it does not exceed its max cap. Pledging less collateral reduces an institution’s
effective maximum daylight overdraft capacity level, but pledging more collateral does not
increase the maximum daylight overdraft capacity above the approved max cap level. Collateral
pledged to support a max cap offsets daylight overdraft fees.
2. Streamlined procedure for certain foreign banking organizations (FBOs)
An FBO with an FBO PSR capital category 37 of highly capitalized and 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 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 10 percent of
worldwide capital times its cap multiple), as long as the FBO remains highly capitalized and the
requested total capacity is 100 percent or less of worldwide capital times the self-assessed cap
multiple 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
35
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.
36
A depository institution may revise its request for additional collateralized daylight overdraft capacity at any time,
provided there is sufficient justification for doing so.
37
The four FBO PSR capital categories for FBOs are “highly capitalized,” “sufficiently capitalized,”
“undercapitalized,” and “intraday credit ineligible.” To determine whether it is “highly capitalized” or “sufficiently
capitalized,” an FBO should compare its risk-based capital ratios to the corresponding ratios in Regulation H for
well-capitalized and adequately capitalized banks. 12 CFR 208.43(b). Additionally, an FBO must have a leverage
ratio of 4 percent or 3 percent (calculated under home-country standards) to qualify as, respectively, “highly
capitalized,” or “sufficiently capitalized.” To determine whether it is “undercapitalized,” an FBO would compare its
risk-based capital ratios to the corresponding ratios in Regulation H. Additionally, an FBO would be deemed
“undercapitalized” if its home-country leverage ratio is less than 3 percent. Finally, to determine whether it is
intraday credit ineligible, an FBO should compare its risk-based capital ratios to the corresponding ratios in
Regulation H for “significantly undercapitalized” banks. Additionally, an FBO would be “deemed intraday credit
ineligible” if its home-country leverage ratio is less than 2 percent.

Daylight Overdraft Capacity 15
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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. 38 If
an eligible FBO requests capacity in excess of 100 percent of worldwide capital times the selfassessed 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. 39
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. 40 An institution that has been approved for maximum daylight overdraft capacity
38
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; 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.
39
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.
40
See the Federal Reserve Collateral Guidelines, supra note 25. 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.

Daylight Overdraft Capacity 16
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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. 41 For more information on collateral, refer to
the Collateral section (III) of this Guide.

41
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 17
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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
• 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 unencumbered collateral pledged
to secure the collateralized capacity.

Daylight Overdraft Capacity 18
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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
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. 42

42

While a board of directors resolution for the max cap may not be required in all instances, the Federal Reserve
believes that it is important for the institution’s board to be aware of the institution’s daylight overdraft capacity
limits with the Federal Reserve.

Daylight Overdraft Capacity 19
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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 de minimis or selfassessed net debit cap (average, above average, or high), when requesting a maximum daylight
overdraft capacity for the first time under the general procedures, or when requesting an increase
of the maximum daylight overdraft capacity under the general procedure. 43 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 (see
Appendix B for 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:
•

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 self-assessment 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

•

43

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 20
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•

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

In conjunction with an institution’s primary supervisor, the Reserve Bank reviews each
resolution for appropriateness.
The board of directors’ resolutions for de minimis and self-assessed institutions are valid
for one year after the Reserve Bank approves the net debit cap. 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. 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.
Under the general procedure for requesting a max cap, an institution with a max cap must submit
a board of directors’ resolution if the institution is requesting collateralized capacity for the first
time or if the institution is requesting an increase to a previously-approved max cap. Once
approved, an annual board of directors resolution is not required under the general procedure for
requesting a max cap. As noted above, in most cases, a business case justifying the max cap is
not required under the general procedure for requesting a max cap. Similarly, neither a business
case justification nor a board of directors’ resolution is required under the streamlined max cap
procedure.
F. Confidentiality of Cap Information
The Federal Reserve regards cap categories and net debit caps, including max caps, as
confidential information and will share this information only with an institution’s primary
supervisor (5 U.S.C. § 552(b)). 44 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.

44
For more information on the Freedom of Information Act, see
http://www.federalreserve.gov/generalinfo/foia/foiastat.cfm.

Collateral 21
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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. 45 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. 46
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. 47 A Reserve Bank may also accept in-transit book-entry
securities as collateral for PSR purposes at its discretion. 48 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. 49 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. 50 An institution’s collateralized daylight overdrafts is charged a
zero fee, and uncollateralized daylight overdrafts are assessed a fee of 50 basis points.

45
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.
46
Federal Reserve policies and procedures related to discount window lending programs are located at
http://www.frbdiscountwindow.org.
47
For information on types of acceptable collateral, see the Federal Reserve Collateral Guidelines, supra note 25.
48
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.
49
Institutions may also pledge collateral for Treasury purposes, which may be held in a number of Treasury program
collateral accounts.
50
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 22
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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. 51 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. 52
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
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

51
For more information on commonly pledged asset types, see the Federal Reserve Collateral Guidelines, supra
note 25. The link to the Federal Reserve Collateral Guidelines is for informational purposes only, is subject to
change without notice, and is not binding on the Federal Reserve System in any particular transaction.
52
The discount window and PSR collateral margins table is found on the Federal Reserve Collateral Guidelines,
supra note 25.

Collateral 23
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modeled fair market value for each loan, based on loan-specific characteristics. 53 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 the Federal Reserve Bank Collateral Guidelines. 54
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. 55 All
collateral pledged to a Reserve Bank must be free of any conflicting claims, liens, security
interests or restrictions upon transfer or pledge to the Reserve Bank. 56 The Reserve Bank must
be able to obtain a perfected first priority security interest in collateral.

53

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.
54
See supra note 25.
55
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.
56
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.

Collateral 24
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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. 57
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. 58 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.
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.

57
58

For more information, visit the Federal Reserve Collateral Guidelines, supra note 25.
Contact information for Wholesale Operations staff is available at
https://www.frbservices.org/contactus/fedwire.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 https://frbservices.org/..

Collateral 25
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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. 59
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. 60
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. 61
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.
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
59
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.
60
Institutions must complete the appropriate documentation to qualify for a BIC arrangement.
61
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 26
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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. 62
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 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. 63 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
purchases. 64 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.

62

Additionally, an alternative manual deposit process may be used for Euroclear. See the Federal Reserve
Collateral Guidelines for more information, supra note 25.
63
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.
64
Pledging institutions must filter out from the report those Fedwire securities that are not discount window eligible.

Collateral 27
_________________________________________________________________________
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. 65 The
procedure to withdraw collateral depends on the collateral’s pledging arrangement. 66
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
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. 67 The Reserve Bank will review the request to determine if the collateral is
65
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.
66
For more information on pledging arrangements refer to the Federal Reserve Collateral Guidelines, supra note 25.
67
Withdrawal requests must be quoted in US dollars.

Collateral 28
_________________________________________________________________________
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.
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.

Collateral 29
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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. 68 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'
banks that do not hold reserves, limited-purpose trust companies, GSEs, and international
organizations are not permitted to incur daylight overdrafts. 69 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. 70

68
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.
69
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.
70
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 30
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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. 71 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. 72
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 System (ABS), which are Federal Reserve applications that serve as information sources
and as balance monitoring and management tools for institutions.73
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
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 ABS. 74 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 ABS 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.
71
72

For more information on ILCs, see part B of the Special Situations section (VI) 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.
73
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
https://www.frbservices.org/financial-services/accounting/account-management-info.html. ABS receives updated
collateral information, including an institution’s value of collateral available for daylight overdraft purposes, from
CMS on a near-real-time basis. ABS 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. Institutions can obtain information on ABS and AMI in the Account Management Guide at
https://www.frbservices.org/resources/financial-services/accounting/rules-regulations.html.
74
AMI and ABS do not provide institutions with information on extensions of credit.

Collateral 31
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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. 75 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.

75

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 32
_________________________________________________________________________
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 7:00 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. 76
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. 77 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. 78 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. 79 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.

76
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. The schedule of
daylight overdraft posting rules are available in part II of the PSR policy available at
http://www.federalreserve.gov/paymentsystems/psr_about.htm.
77
Id.
78
For institutions pledging in-transit collateral, this collateral information also contains in-transit collateral.
79
In cases of extensions of Fedwire operating hours, all transactions that occur after the standard Fedwire closing
time are posted at 7:00 p.m. for daylight overdraft purposes.

Daylight Overdraft Monitoring and Management 33
_________________________________________________________________________
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). 80 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. 81
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. 82 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. 83 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.

80

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 and the Account Balance System (ABS), contains
additional information on AMI.
81
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.
82
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.
83
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 34
_________________________________________________________________________
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 System (ABS)
The Reserve Banks use ABS 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. ABS
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 ABS or in AMI. While ABS 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, ABS captures debits and credits resulting from other payment activity as those
transactions are processed in the Reserve Banks’ accounting system. 84 ABS also provides

84

ABS receives transaction information from the Fedwire Funds Service, the Fedwire Securities Service, and the
National Settlement Service in real time. ABS receives transaction from EASy with a slight delay regarding cash
and check transactions, and information on prefunded ACH credit originations . ABS 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. ABS 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. For more information on collateral available for
daylight overdraft purposes, see the Collateral section (III) of this Guide.

Daylight Overdraft Monitoring and Management 35
_________________________________________________________________________
authorized Federal Reserve Bank personnel with a mechanism to monitor and control account
activity for selected institutions.
ABS 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 ABS, 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. 85 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.
ABS 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 ABS reflects the balance in the account according to
the transaction posting rules described in the PSR policy. 86
A second balance calculated by ABS, the account (ACCT) balance, reflects the sum of
all transactions posted to ABS 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

85
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: https://www.frbservices.org/resources/rulesregulations/operating-circulars.html.
86
The schedule of posting rules is located in part II of the PSR policy, available at
https://www.federalreserve.gov/paymentsystems/psr_about.htm.
There may be some instances when the DLOD balance in ABS 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 ABS continuously updates balances as transactions are
processed. In addition, the DLOD balance in ABS 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 36
_________________________________________________________________________
posted to the institution’s account. 87 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 ABS 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). 88 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. 89 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 https://www.frbservices.org/resources/financial-services/accounting/rulesregulations.html.

87

Reserve Banks use the memo post function of ABS to post transactions to ABS that may not be passed to the
Federal Reserve Bank’s accounting system until later in the day (for example, cash shipments).
88
Collateral available for daylight overdraft purposes does not necessarily reflect the amount of collateral available
for new lending or available for withdrawal.
89
For more information on how the Federal Reserve calculates daylight overdraft fees, see the Daylight Overdraft
Fees section (V) of this Guide.

Daylight Overdraft Fees 37
_________________________________________________________________________
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). 90 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.

90

The schedule of posting rules is located in part II of the PSR policy, available at
https://www.federalreserve.gov/paymentsystems/psr_about.htm.
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 ABS or AMI. See https://frbservices.org/. for further information.
Institutions can also access information regarding their collateral available for daylight overdraft purposes through
ABS 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 38
_________________________________________________________________________
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 has been
calculated, the application sums these values. 91 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. 92
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. 93 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 22 hours out of 24. Thus,
the current effective annual rate charged for overdrafts is 45.83 basis points (50 basis points x
22/24 hours). The effective annual rate is converted to an effective daily rate by multiplying it
by 1/360. 94
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 twoweek charges over $150 have their gross fees reduced by $150. 95 In the example, the
institution’s charges for this reserve maintenance period are $22.90. The finalized charges are
91
92

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 Service currently extends from 9:00 p.m. ET the preceding
calendar day to 7:00:59 p.m. ET. The occasional extensions of Fedwire beyond the standard 22-hour day do not
affect the number of minutes used in computing the average overdraft.
93
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).
94
The effective daily daylight-overdraft rate is truncated to 0.0000127.
95
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.

Daylight Overdraft Fees 39
_________________________________________________________________________
passed to the Enterprise Accounting System (EASy) 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

Daylight overdraft balance
(in millions)

1
2
3
4
5
6

2:00 PM
2:01 PM
2:02 PM
2:03 PM
2:04 PM
2:05 PM

$100
$0
($800)
($100)
($600)
($600)

7

Collateral available for daylight
overdraft purposes
(in millions)
$50
$50
$100
$100
$100
$0

Sum of end-of-minute uncollateralized daylight overdraft

Uncollateralized
daylight overdraft
(in millions)
$0
$0
$700
$0
$500
$600
$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 = $1,362,604.09
official Fedwire day = 22 hours (or 1,321 minutes)
1,321
B. Daily daylight overdraft charge
average daily uncollateralized overdraft =
multiplied by effective daily rate 96 = .0050 x (22/24) x (1/360) =

$1,362,604.09
x .0000127
$17.31
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 = $17.31 x 10 days per reserve maintenance period 97
= $173.10
B. Subtract the waiver from the gross reserve maintenance period overdraft charge 98
less

96
97

$150 fee waiver

─ $150.00
$23.10

The effective daily daylight-overdraft rate is truncated to 0.0000127.
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.
98
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.

Daylight Overdraft Fees 40
_________________________________________________________________________
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. 99 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.
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. 100 Penalty feepaying 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. 101 These

99

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
https://www.frbservices.org/resources/financial-services/accounting/rules-regulations.html.
100
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 Service normally operates (22 hours
out of 24 hours), divided by 360 days.
101
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 Fees 41
_________________________________________________________________________
institutions are subject to a minimum fee of $25 for any reserve maintenance period in which
they incur a fee. 102

102

For more information regarding these types of accounts, see the Special Situations section (VI) of this Guide.

Special Situations 42
_________________________________________________________________________
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 103
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.
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, which equals 10 percent of the FBO’s worldwide
capital.
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. 104 A net debit cap, or any extension of
intraday credit, is granted to an institution at the discretion of the Reserve Bank.
As in the case of U.S. institutions, the ARB must have the ability to regularly assess 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 will require U.S. branches and agencies of FBOs seeking a positive
daylight overdraft cap (exempt, de minimis, or self-assessed cap categories) to provide the riskbased capital ratios used to determine the FBO PSR capital category at the time the cap is

103
104

A U.S. branch or agency is a branch or agency of a foreign banking organization located in the United States.
A copy of the FR 2225 report and instructions is available at
http://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDZ1kLYTc+ZpEQ==.

Special Situations 43
_________________________________________________________________________
established and at least annually thereafter. 105 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)). 106 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 with an FBO PSR capital category of highly capitalized 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
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. 107 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
105
Descriptions of capital measures, by type of institution, and related regulatory reports can be found in Appendix
C. The FR Y-7Q report collects consolidated regulatory capital information from all (FBOs) either quarterly or
annually. FBOs that have effectively elected to become financial holding companies (FHCs) are required to report
the FR Y-7Q on a quarterly basis. All other FBOs (those that have not elected to become FHCs) are required to
report the FR Y-7Q annually. The Board's FR Y-7Q report currently requires that FBOs with total consolidated
assets of $50 billion or more report the numerators and denominators needed to calculate all of the risk-based capital
ratios in the FBO PSR capital category determination. The FR Y-7Q report also requires that FBOs with total
consolidated assets below $50 billion report the numerators and denominators needed to calculate all ratios in the
FBO PSR capital category determination except the common equity tier 1 capital ratio. FBOs with total consolidated
assets below $50 billion that are based in Basel jurisdictions already calculate their common equity tier 1 capital
ratios under home-country standards. A copy of FR Y-7Q is available at
https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDYZF7OsZFXqBA==.
106
For more information on the Freedom of Information Act, see
http://www.federalreserve.gov/foia/about_foia.htm.
107
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.

Special Situations 44
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agency. Each branch or agency is eligible for the $150 fee waiver. 108 Branches and agencies
with allocated caps must post collateral separately for each account that incurs daylight
overdrafts to be eligible for the FCCB waiver. 109
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. 110 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.
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. 111 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. 112 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
108
109

See section VI for further information on daylight overdraft fee calculation.
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.
110
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.
111
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.
112
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 45
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currently have affiliate accounts and that they will notify the Reserve Bank promptly should that
status change. (Appendix B provides a sample certification letter.)
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. 113
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 114
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.

113

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.
114
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)).

Special Situations 46
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2. Bankers’ banks 115
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
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 116
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 117
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.

115
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)).
116
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)).
117
GSEs include (but are not limited to) 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 (but are not limited to) 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 47
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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. 118 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.
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.

118

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 10 percent of their worldwide capital, as their capital measure.

Self-Assessment Procedures 48
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Further, 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.
A. Creditworthiness Component
For most institutions, the appropriate net debit cap category is principally
determined by the institution’s most-recent supervisory ratings and the institution’s capital
category. 119 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.
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.
U.S. branches and agencies of FBOs that are based in jurisdictions that have implemented
capital standards substantially consistent with those established by the Basel Committee on
Banking Supervision will not be required to complete an assessment of creditworthiness, but
Reserve Banks will assess such an FBO’s creditworthiness based on the FBO’s supervisory
rating and the FBO PSR capital category.
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 the institution’s
capital category, into a creditworthiness assessment. This approach is designed to simplify the
process of assessing creditworthiness.

119
For the purposes of the self-assessment procedures, a domestically chartered institution’s capital category is
defined by the Federal Deposit Insurance Act. Similarly, an FBO would determine its FBO PSR capital category by
comparing the Regulation H ratios for total risk-based capital, tier 1 risk-based capital, common equity tier 1 riskbased capital, and leverage ratio to the equivalent ratios that the FBO has calculated under its home-country
standards or on a pro forma basis.

Self-Assessment Procedures 49
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Table VII – 1: Creditworthiness Matrix for Domestically Chartered Institutions and U.S.
Branches and Agencies of Foreign Banks
Supervisory composite rating 121
PCA designation/
FBO PSR capital
Marginal or
category 120
Strong
Satisfactory
Fair
Unsatisfactory
Well capitalized/
Excellent
Very good
Adequate
Below standard
Highly capitalized
Adequately capitalized/
Very good
Very good
Adequate
Below standard
Sufficiently capitalized
Undercapitalized

*

*

Below standard

Below standard

Significantly or critically
undercapitalized/
Intraday credit ineligible

Below
standard

Below standard

Below standard

Below standard

* 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.
Similarly, an FBO with an FBO PSR capital category of highly capitalized or sufficiently
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
120
The FBO PSR capital category is used only in the PSR policy as a measure analogous to the Prompt Corrective
Action designation for domestic institutions. FBOs calculate these ratios under their home-country standards or on a
pro forma basis. To determine whether it is highly capitalized or sufficiently capitalized, an FBO should compare its
risk-based capital ratios to the corresponding ratios in Regulation H for well-capitalized and adequately capitalized
banks. 12 CFR 208.43(b). An FBO must have a leverage ratio of 4 percent or 3 percent (calculated under homecountry standards) to qualify as, respectively, highly capitalized or sufficiently capitalized. To determine whether it
is undercapitalized, an FBO would compare its risk-based capital ratios to the corresponding ratios in Regulation H.
An FBO would be deemed undercapitalized if its home-country leverage ratio is less than 3 percent. Finally, to
determine whether it is intraday credit ineligible, an FBO should compare its risk-based capital ratios to the
corresponding ratios in Regulation H for significantly undercapitalized banks. Additionally, an FBO would be
deemed intraday credit ineligible if its home-country leverage ratio is less than 2 percent.
121
Supervisory ratings, such as the Uniform Financial Institution Rating System (CAMELS) and the RFI Rating
System, are generally assigned on a scale from 1 to 5, with 1 being the strongest rating. Thus, a supervisory rating
of 1 is considered Strong, a rating of 2 is considered Satisfactory, a rating of 3 is considered Fair, a rating of 4 is
considered Marginal, and a rating of 5 is considered Unsatisfactory. An institution will not be eligible for
uncollateralized capacity if a supervisory agency assigns a Marginal or Unsatisfactory supervisory rating to the
institution. If an institution’s holding company has been assigned a Deficient-2 rating in any of the components of
the Large Financial Institution (LFI) rating system or an RFI rating of 4 or 5, the institution will not be eligible to
request the “above average” and “high” self-assessed cap categories but may be eligible for a lower cap category
Similarly, if an institution’s affiliates are assigned a Marginal or Unsatisfactory supervisory rating, the institution
will not be eligible to request the “above average” and “high” self-assessed cap categories but may be eligible for a
lower cap category. Reserve Banks will assign an institution a “zero” net debit cap if supervisory information about
the holding company and affiliated institutions reveals material operating or financial weaknesses that pose
significant risks to the institution.

Self-Assessment Procedures 50
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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 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 or FBO PSR capital category is undercapitalized, the institution must
perform a full assessment of creditworthiness.
Full assessments of creditworthiness
Certain conditions 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.
Any significant developments that may materially affect the financial condition or supervisory
assessment of the institution, may warrant that an institution perform a full assessment of its
creditworthiness, regardless of an institution’s supervisory ratings or capital category. A Reserve
Bank may also require U.S. branches and agencies of FBOs that are based in jurisdictions that
have not implemented capital standards substantially consistent with those established by the
Basel Committee on Banking Supervision to perform a full assessment of creditworthiness to
determine whether the FBO meets reasonable safety and soundness standards. Finally, FBOs
based in non-Basel jurisdictions that request any net debit cap greater than the exempt-fromfiling category must 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. 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.
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
creditworthiness, the creditworthiness rating achieved is not necessarily related to or reflective of
the rating that would result from a regulatory examination.

Self-Assessment Procedures 51
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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.
The situation may arise when a supervisory agency discloses material operating or
financial weakness within the holding 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. In some cases, an institutions may be eligible for the “exempt-from-filing,” “de
minimis,” or “average” cap categories despite a “Marginal” or "Unsatisfactory” rating assigned
to the holding company or affiliated institutions.
If the holding 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
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 the FBO PSR capital category 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

Self-Assessment Procedures 52
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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
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).

Self-Assessment Procedures 53
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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
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

Self-Assessment Procedures 54
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rules for payments settled through Federal Reserve accounts. 122 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. 123
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
122
The schedule of posting rules is located in part II of the PSR policy, available at
https://www.federalreserve.gov/paymentsystems/psr_about.htm.
123
For more information, please see Outsourcing of Information and Transaction Processing, SR Letter 00-4,
February 29, 2000.

Self-Assessment Procedures 55
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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.
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

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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
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.

Self-Assessment Procedures 57
_________________________________________________________________________

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.

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

Self-Assessment Procedures 58
_________________________________________________________________________
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)
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.

Self-Assessment Procedures 59
_________________________________________________________________________

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.
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

Self-Assessment Procedures 60
_________________________________________________________________________
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 61
_________________________________________________________________________
E. Overall Self-Assessment Rating
Table VII-2 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-2
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-62
_________________________________________________________________________
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. 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 self-assessment rating.

Self-Assessment Worksheets A-63
_________________________________________________________________________
Index
1. Assessment of Creditworthiness .............................................................................................64
1.A. Creditworthiness Matrix Procedures ...........................................................................64
1.B. Full Assessment of Creditworthiness Procedures........................................................68
1.B.i. Capital Adequacy.........................................................................................................70
1.B.ii. Key Performance Measures .......................................................................................73
Asset Quality .................................................................................................................... 73
Earnings Performance .....................................................................................................76
Liquidity............................................................................................................................78
1.B.iii. Condition of Affiliated Institutions..........................................................................80
1.B.iv. Integrating the Three Factors ...................................................................................81
2. Assessment of Intraday Funds Management and Control...................................................83
3. Assessment of Customer Credit Policies and Controls ........................................................85
3.A. Assessment of Credit Policies ........................................................................................85
3.B. Assessment of Customer, Correspondent, and Counterparty Creditworthiness .....86
3.C. Monitoring Customer and Counterparty Intraday Payment Activity ......................87
3.D. Monitoring Customer Interday Payment Activity ......................................................89
3.E. Overall Rating: Customer Credit Policies and Controls ............................................90
4. Assessment of Operating Controls and Contingency Procedures .......................................91
4.A. Internal Operating Controls .........................................................................................91
4.B. Contingency Procedures ................................................................................................93
4.C. Overall Rating: Operating Controls and Contingency Procedures ..........................94
5. Combining the Four Components ..........................................................................................95

Self-Assessment Worksheets A-64
_________________________________________________________________________
1. Assessment of Creditworthiness
1.A. Creditworthiness Matrix Procedures
Supervisory Assessment
Record the composite rating from the last supervisory examination in the upper portion of
table A-1.
Capital Assessment
Domestic institutions. 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 (PCA) designation and record the
results in the upper portion of table A-1.
FBOs. Determine the FBO PSR capital category by comparing the risk-based capital
ratios to the corresponding ratios in Regulation H. 124 Record the results in the upper portion of
table A-1.
To determine whether it is highly capitalized or sufficiently capitalized, an FBO should
compare its risk-based capital ratios to the corresponding ratios in Regulation H for wellcapitalized and adequately capitalized banks. Additionally, an FBO must have a leverage ratio of
4 percent or 3 percent (calculated under home-country standards) to qualify as, respectively,
highly capitalized or sufficiently capitalized. To determine whether it is undercapitalized, an
FBO should compare its risk-based capital ratios to the corresponding ratios in Regulation H.
Additionally, an FBO would be deemed undercapitalized if its home-country leverage ratio is
less than 3 percent. Finally, to determine whether it is intraday credit ineligible, an FBO should
compare its risk-based capital ratios to the corresponding ratios in Regulation H for significantly
undercapitalized banks. Additionally, an FBO would be deemed intraday credit ineligible if its
home-country leverage ratio is less than 2 percent.
The following table illustrates the capital ratios that an FBO will use to determine its FBO PSR
capital category. 125
FBO PSR capital category

Total risk-based
capital measure

Tier 1 risk-based
capital measure

Highly capitalized
Sufficiently capitalized
Undercapitalized
Intraday credit ineligible

10%
8%
<8%
<6%

8%
6%
<6%
<4%

124
125

Common
equity tier 1
capital measure
6.5%
4.5%
<4.5%
<3%

Home-country
leverage ratio
4%
3%
2%
<2%

See 12 CFR 208.43.
The risk-based capital ratios in the table are based on the ratios currently codified in Regulation H and will
change correspondingly with any future revisions to Regulation H.

Self-Assessment Worksheets A-65
_________________________________________________________________________
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
holding 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 holding company or affiliated institutions will have either a neutral,
negative, or limited impact on the institution completing the assessment. If the holding 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.
This situation may arise when a supervisory agency discloses material operating or
financial weakness within the holding 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 concerns do not reveal material operating or financial weakness
within the holding company or affiliated institutions and the weaknesses do not pose significant
risk to the institution, the institutions may be eligible for the “exempt-from-filing,” “de
minimis,” or “average” cap categories despite a “Marginal” or “Unsatisfactory” rating assigned
to the holding company or affiliated institutions.
•

If the supervisory rating of the holding company or affiliates is “Marginal” or
“Unsatisfactory,” and the supervisory concerns reveal material operating or financial
weakness within the holding company or affiliated institutions that pose significant
risk to the institution, the assigned rating is “negative.”

•

If the supervisory rating of the holding company or affiliates is “Marginal” or
“Unsatisfactory,” but the supervisory concerns do not reveal material operating or
financial weakness within the holding company or affiliated institutions that pose
significant risk to the institution, the assigned rating is “limited.” The assigned rating
will not result in an upgrade or downgrade of the other factors

•

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-66
_________________________________________________________________________
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 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-67
_________________________________________________________________________
Table A-1
Creditworthiness Matrix Summary
PRIMARY MEASURES
SUPERVISORY ASSESSMENT:
CAPITAL ASSESSMENT:
CONDITION OF AFFILIATES ASSESSMENT:

Supervisory
Assessment

Capital
assessment

Condition of
affiliates
assessment

Overall
creditworthiness

Domestic capital category

FBO PSR capital
category

Strong

Well capitalized

Highly capitalized

Neutral

Excellent

Strong

Adequately capitalized

Sufficiently capitalized

Neutral

Very good

Strong

Undercapitalized

Undercapitalized

Neutral

*

Satisfactory

Well capitalized

Highly capitalized

Neutral

Very good

Satisfactory

Adequately capitalized

Sufficiently capitalized

Neutral

Very good

Satisfactory

Undercapitalized

Undercapitalized

Neutral

*

Fair

Well capitalized

Highly capitalized

Neutral

Adequate

Fair

Adequately capitalized

Adequately capitalized

Neutral

Adequate

Any rating

Any level

Any level

Limited**

Adequate

Fair

Undercapitalized

Undercapitalized

Neutral

Below standard

Marginal

Any level

Any level

Any rating

Below standard

Unsatisfactory

Any level

Any level

Any rating

Below standard

Any rating

Significantly undercapitalized

Intraday credit ineligible

Any rating

Below standard

Any rating

Critically undercapitalized

Intraday credit ineligible

Any rating

Below standard

Any rating

Any level
Any level
Negative
Below standard
* Full assessment of creditworthiness must be performed.
** The institution would be eligible to request the “exempt-from-filing,” “de minimis,” or “average” cap
categories, but not the “above average” or “high” cap categories.

Overall Creditworthiness Rating:

Self-Assessment Worksheets A-68
_________________________________________________________________________
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. 126 Also, similar information is available from bank trade
associations, public accounting firms, rating agencies, and other private vendors.
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.
126

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

Self-Assessment Worksheets A-69
_________________________________________________________________________
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-70
_________________________________________________________________________
1.B.i. Capital Adequacy
In most cases, the FDICIA Capital Zones for Prompt Corrective Action (PCA)
designation 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 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. The Board's FR Y-7Q report currently requires that FBOs with total consolidated assets of
$50 billion or more report the numerators and denominators needed to calculate all of the riskbased capital ratios in the FBO PSR capital category determination. The FR Y-7Q report also
requires that FBOs with total consolidated assets below $50 billion report the numerators and
denominators needed to calculate all ratios in the FBO PSR capital category determination
except the common equity tier 1 capital ratio. FBOs with total consolidated assets below $50
billion that are based in Basel jurisdictions already calculate their common equity tier 1 capital
ratios under home-country standards. Additionally, the Board has clarified that the leverage
measure component of the FBO PSR capital category will be based solely on the FBO's leverage
ratio as calculated under home-country standards.

Self-Assessment Worksheets A-71
_________________________________________________________________________
Capital Adequacy Worksheet – Domestic Institutions
Institution
(original)

Institution
(adjusted*)

Regulatory
standard 127

Peer

Total risk-based capital measure =
Total capital/risk-weighted assets
Tier 1 capital ratio =
Tier I capital/risk-weighted assets
Common equity tier 1 capital ratio =
Common equity tier capital/riskweighted assets
Leverage ratio =
Tier I capital/total assets
* 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:

127
Regulation H Regulatory standards are subject to change and are dependent on the type of institution. See 12
C.F.R. 208.43.

Self-Assessment Worksheets A-72
_________________________________________________________________________
Capital Adequacy Worksheet – FBOs
Institution
(original)

Institution
(adjusted*)

Regulatory
standard 128

Peer

Total risk-based capital measure =
Total capital/risk-weighted assets
Tier 1 capital ratio =
Tier I capital/risk-weighted assets
Common equity tier 1 capital ratio =
Common equity tier capital/riskweighted assets
Home country leverage ratio =
Tier I capital/total assets

* 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?

____

Highly capitalized

____

Sufficiently capitalized

____

Undercapitalized

____

Intraday credit ineligible

Capital Adequacy Rating:

128
Regulation H Regulatory standards are subject to change and are dependent on the type of institution. See 12
C.F.R. 208.43.

Self-Assessment Worksheets A-73
_________________________________________________________________________
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-74
_________________________________________________________________________
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-75
_________________________________________________________________________
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-76
_________________________________________________________________________
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-77
_________________________________________________________________________
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-78
_________________________________________________________________________
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 non-core 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 non-core 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-79
_________________________________________________________________________
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-80
_________________________________________________________________________
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
holding 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 holding company or affiliated institutions will have either a neutral,
negative, or limited impact on the institution completing the assessment. If the holding 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.
This situation may arise when a supervisory agency discloses material operating or
financial weakness within the holding 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 concerns do not reveal material operating or financial weakness
within the holding company or affiliated institutions and the weaknesses do not pose significant
risk to the institution, the institutions may be eligible for the “exempt-from-filing,” “de
minimis,” or “average” cap categories despite a “Marginal” or “Unsatisfactory” rating assigned
to the holding company or affiliated institutions.
•

If the supervisory rating of the holding company or affiliates is “Marginal” or
“Unsatisfactory,” and the supervisory concerns reveal material operating or financial
weakness within the holding company or affiliated institutions that pose significant
risk to the institution, the assigned rating is “negative.”

•

If the supervisory rating of the holding company or affiliates is “Marginal” or
“Unsatisfactory,” but the supervisory concerns do not reveal material operating or
financial weakness within the holding company or affiliated institutions that pose
significant risk to the institution, the assigned rating is “limited.” The assigned rating
will not result in an upgrade or downgrade of the other factors

•

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-81
_________________________________________________________________________
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-82
_________________________________________________________________________
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

Any Rating

Any rating

Limited

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-83
_________________________________________________________________________
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-84
_________________________________________________________________________
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-85
_________________________________________________________________________
3. Assessment of Customer Credit Policies and Controls
3.A. Assessment of Credit Policies
Yes
1.

2.

No

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

_____ _____

Do the credit policies address interday and intraday credit
extensions?

_____ _____

3.

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?
_____ _____

_____ _____

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-86
_________________________________________________________________________
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-87
_________________________________________________________________________
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-88
_________________________________________________________________________
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-89
_________________________________________________________________________
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-90
_________________________________________________________________________
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-91
_________________________________________________________________________
4. Assessment of Operating Controls and Contingency Procedures
4. A. Internal Operating Controls
Yes

1.

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

No

_____ _____

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-92
_________________________________________________________________________
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-93
_________________________________________________________________________
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.

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?

_____ _____

3.

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

4.

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-94
_________________________________________________________________________
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-95
_________________________________________________________________________
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-96
_________________________________________________________________________
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-97
_________________________________________________________________________
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-98
_________________________________________________________________________
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-99
_________________________________________________________________________
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-100
_________________________________________________________________________
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
[If requesting zero or de minimis net debit cap, and max cap]
WHEREAS, the board of directors hereby has this day met and in accordance with the
Federal Reserve’s guidelines; recommends 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 net debit cap category:
Daylight overdraft cap category

(Zero, De minimis)

[If requesting a self-assessed net debit, and a max]
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)

Sample Letters and Resolutions B-101
_________________________________________________________________________
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
and agrees to pledge collateral acceptable to the Federal Reserve Bank of ______________ in
form to support such increased usage. 129
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)

129

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-102
_________________________________________________________________________
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-103
_________________________________________________________________________
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-104
_________________________________________________________________________
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.

Capital information for these institutions is calculated from data reported on the
Federal Financial Institutions Examination Council (FFIEC) forms 031-034. Please
refer to the instructions for FFIEC forms 031-034.
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).

Capital Measures C-105
_________________________________________________________________________
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).
5. Corporate credit unions:
These institutions report capital data on the NCUA Financial Statistical Report (NCUA
5310)
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)..

Glossary 106
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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 System (ABS)—The Reserve Bank application that provides real-time
account balance and collateral information to depository institutions and the Reserve Banks.
ABS also allows Reserve Banks to monitor depository institutions’ account balances and
payment activity on a real-time basis, and reject or intercept certain transactions. Also see realtime 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
https://www.frbservices.org/financial-services/accounting/account-management-info.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. See pub. L. No. 100-86, 101 Stat. 552,
codified as 12 U.S.C. § 1841, et seq., available at
https://www.govinfo.gov/app/details/USCODE-2018-title12/USCODE-2018-title12-chap17sec1841/summary.

Glossary 107
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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
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.
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 ten percent of the FBOs’ worldwide capital.

Glossary 108
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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
ABS or to AMI may view their collateral available for daylight overdraft purposes in near-realtime 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.

Glossary 109
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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.
FBO PSR capital category—One of the four categories into which U.S. branches and agencies
of FBOs are group. The FBO PSR capital category is used only in the PSR policy for purposes
of calculating eligibility for net debit caps and streamlined max cap.  The four FBO PSR capital
categories for FBOs are “highly capitalized,” “sufficiently capitalized,” “undercapitalized,” and
“intraday credit ineligible.” In order to determine its FBO PSR capital category, an FBO would
compare the Regulation H ratios for total risk-based capital, tier 1 risk-based capital, common
equity tier 1 risk-based capital, and leverage to the equivalent ratios that the FBO has calculated
under its home-country standards or on a pro forma basis.
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

Glossary 110
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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.
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.

Glossary 111
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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)).
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 (max cap)—An institution’s net debit cap plus its
collateralized capacity. (See collateralized capacity.) Provided that they meet the eligibility
criteria, institutions can request maximum daylight overdraft capacity from the Federal Reserve
regardless of their cap category.
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.

Glossary 112
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Prompt Corrective Action (PCA) designation—An insured depository institution is (1) “well
capitalized” if it significantly exceeds the required minimum level for each relevant capital
measure, (2) “adequately capitalized” if it meets the required minimum level for each relevant
capital measure, (3) “undercapitalized” if it fails to meet the required minimum level for any
relevant capital measure, (4) “significantly undercapitalized” if it is significantly below the
required minimum level for any relevant capital measure, or (5) “critically undercapitalized” if it
fails to meet any leverage limit (the ratio of tangible equity to total assets) specified by the
appropriate federal banking agency, in consultation with the FDIC, or any other relevant capital
measure established by the agency to determine when an institution is critically undercapitalized.
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_about.htm.
Real-time monitoring—The ABS 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
over which daylight overdrafts are monitored and charges may be assessed.
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).

Glossary 113
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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.