New PAYMENT SYSTEM RISK - Federal Reserve Bank of Chicago · 2014. 11. 15. · Payment System Risk Policy Previous Strategy – Institutions encouraged to minimize its use of Federal

PAYMENT SYSTEM RISK

Agenda

Background & Timeline

Payment System Risk (“PSR”) Policy

Federal Reserve Risk Management Tools– Net Debit Capacity & Capacity Breaches

– Account Monitoring

– Daylight Overdraft Pricing

Overview of Recent PSR Policy Changes

Enhancements to Automated Systems

Overnight Overdrafts (“ONODs”)

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Background of PSR Policy

What is Payment System Risk?– Risk of loss in sending or receiving payments due to events such

as:• Counterparty or customer default• Operational problems• Default• Legal uncertainty

Federal Reserve PSR Policy implemented in 1985 to establish maximum limits (net debit caps) on institutions use of intraday credit

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PSR Policy: Timeline

2005 – 2008: Review of long-term effects of market, operational, and policy changes by the financial industry and the Federal Reserve on intraday liquidity, operational, and credit risks in financial markets and the payments system

February 2008: Request for public comment to revise PSR policy to improve safety and efficiency trade-offs in the payment system

Effective March 24, 2011: PSR Policy revised to improve intraday liquidity management and payment flows for the banking system and to help mitigate the credit exposures of the Reserve Banks (adopted December 2008)

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Payment System Risk Policy

Previous Strategy

– Institutions encouraged to minimize its use of Federal Reserve intraday credit

Revised Strategy (Effective March 24, 2011)

– Explicitly recognizes central bank role in providing balances through intraday facility

– Provides intraday balances to healthy depository institutions (DIs), predominantly through collateralized daylight overdrafts

– Aims to reduce reliance on uncollateralized daylight overdrafts over time, if this can be done without payment system disruption or other unintended adverse consequences

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Key Policy Changes, Effective March 24, 2011 Significant Change Previous Policy Revised Policy

Collateral Required for problem institutions and institutions with max caps only.

Collateral eligibility and margins same as discount window

Additional provision that explicitly applies collateral pledged by healthy institutions to daylight overdrafts in

their Reserve Bank accounts

Fee for collateralized daylight overdrafts 36 basis points Zero fee

Fee for uncollateralized daylight overdrafts

36 basis points 50 basis points

Deductible 10 percent of an institution’s capital measure

Deductible is eliminated. Replaced by zero fee for collateralized daylight

overdrafts and increased fee waiver

Fee waiver Up to $25 biweekly $150 biweekly

Net debit cap Two-week average limit and higher single-day limit

Two-week average limit is eliminated; adjusted policy for single-day limit

Max cap Additional collateralized capacity above net debit cap for self-

assessed institutions

Streamlined process for certain FBOs up to a limit; minor changes for all

institutions

Risk Management Tools

Net Debit Capacity (Cap) & Cap Breaches

Daylight Overdraft Pricing & Fees

Account Monitoring

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Net Debit Caps

CAP CATEGORY CAP MULTIPLES

High 2.25

Above Average 1.875

Average 1.125

De Minimis 0.40

Exempt-from-Filing $10 Million or 0.20*

Zero 0

* The lesser of $10 Million or 0.20

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Net Debit Caps

Under the PSR Policy, most institutions can typically use daylight credit

– Exempt Cap

• Default Cap Type

• Most Common

• Assigned if De Minimis or Self-Assessed Cap Not Renewed

– De Minimis Cap

• Higher than Exempt Cap, Less than Self-Assessed Cap

• Additional Capacity

• Annual Submission of Board Resolution

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Net Debit Caps

– Self-Assessed Cap• High, Above Average, and Average

• Annual Submission of Board Resolution

• Requires Completion of Self-Assessment to Perform Evaluation of 4 Areas:

– Creditworthiness

– Intraday Funds Management and Control

– Customer Credit Policies and Controls

– Operating Controls and Contingency Procedures

– Zero Cap• Institutions in weak financial condition

• Self-Elected

• Poor Account Management10

Additional Collateralized Capacity

Maximum Capacity (Max Cap)

– Eligible for institutions with Self-Assessed Cap

– Institutions must provide written justification to Federal Reserve Bank

– Written approval required from institution’s Board of Directors

– Capacity beyond Self-Assessed Cap MUST be collateralized

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Net Debit Caps & Cap Breaches

Cap Breach– Occurs when an end-of-minute daylight overdraft exceeds an

institution’s net debit cap

Policy Violations– Exempt cap: cap breach on 3 or more days within two consecutive two-

week RMPs

– Zero cap: any cap breach

– Any cap breach of a De Minimis, Self-Assessed, or Max Cap institution is a violation of policy (some exceptions apply)

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Net Debit Caps & Policy Violations

Counseling Action for Policy Violations– Counseling letter

– If policy violations continue, the Reserve Bank can:• Apply risk controls;

• Remove capacity; or

• Require collateral

Counseling waivers

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Net debit cap

Collateral

Zero Balance

Collateralized & Uncollateralized Cap Breaches

The cap breach is fully collateralized – Zero fee applied to all daylight overdrafts& DI may be eligible for a cap breach waiver.

Zero Balance

Net debit cap

Collateral

Two cap breaches are uncollateralized – Potential fees assigned based on uncollateralized daylight overdrafts and DI ineligible for a cap breach waiver.

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Daylight Overdraft Pricing & Fees

PSR Policy Change: Unencumbered collateral applied to daylight overdrafts for pricing purposes– Credit risk reduction to Reserve Banks

– Flexibility for DIs in crisis and peak liquidity days

Fee lowered to zero from 36 bps for voluntary collateralization of daylight overdraft activity– Reduces incentives to queue payments

Fee increased to 50 bps from 36 bps for uncollateralized daylight overdrafts– Provides greater incentive to pledge collateral

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Daylight Overdraft Pricing & Fees (continued)

Penalty fee raised to 150 bps from 136 bps for entities without regular discount window access

Fee waiver increased to $150 from $25

– Reduces burden of policy on institutions that use small amounts of daylight overdraft credit

– Applied to fees for all eligible depository institutions (Penalty fee payers not eligible)

Fee deductible eliminated

– Zero fee for collateralized daylight overdrafts and increased fee waiver

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Revised Daylight Overdraft Charge Calculation

Policy parameters:

• Official Fedwire day = 21.5 hours

• Rate charged for uncollateralized overdrafts = 50 basis points (annual rate)

Institution's parameters:

• Sum of end-of-minute uncollateralized overdrafts for one day = $4 billion

Daily charge calculation:

• Effective daily rate = .0050 x (21.5/24 hours) x (1/360 days) = 0.0000124

• Average uncollateralized overdraft = $4,000,000,000 / 1291 minutes = $3,098,373.

• Overdraft charge = $3,098,373 x .0000124 = $38.42

• Overdraft charge = $38.42

RMP charge calculation (assuming identical uncollateralized DLOD for each day of the RMP):

• RMP charge: $38.42 x 10 days - $150 waiver = $234.20

NOTE: Only uncollateralized overdrafts are counted in the charge calculation; the charge for collateralized overdrafts is zero.

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Account Monitoring

Daylight Overdrafts Reporting and Pricing System (DORPS)– Ex-Post (After the Fact) Monitoring

Account Balance Monitoring System (ABMS)– Real-Time Monitoring

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Enhancements to Automated Systems

Enables institutions to manage their intraday level of collateralized and uncollateralized overdrafts using the Account Management Information System (AMI)

Enhancements to collateral information available through AMI

New collateral service via AMI will allow institutions to:

– View and download real-time balances and collateral activity information, and

– Download end-of-day reports

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Overnight Overdrafts (ONODs)

Unauthorized extensions of overnight credit

NOT permitted

Penalty charge calculated at a rate of 400 basis points above the daily effective Federal Funds Rate

Minimum ONOD charge $100

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