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Notice2022-26615

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

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Published

December 8, 2022

Effective

February 6, 2023

Issuing agencies

Federal Reserve System

Abstract

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

Full Text

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

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FEDERAL RESERVE SYSTEM

[Docket No. OP-1749]

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

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Notice.

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

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

FOR FURTHER INFORMATION CONTACT: Jason Hinkle, Deputy Associate
Director (202-912-7805), Michelle Olivier, Lead Financial Institution
Policy Analyst (202-452-2404), Brajan Kola, Senior Financial
Institution Policy Analyst (202-736-5683); or Cody Gaffney, Attorney
(202-452-2674), Legal Division, Board of Governors of the Federal
Reserve System. For users of Telecommunications Device for the Deaf
(TDD) only, please contact 202-263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

A. Current Framework for Intraday Credit in the PSR Policy

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

[[Page 75255]]

greater collateralization of daylight overdrafts, recognizing that
collateral reduces credit risk to Reserve Banks.\7\ Specifically, the
Board adopted a dual-pricing framework intended to provide a financial
incentive to institutions to collateralize their daylight overdrafts.
Under the dual-pricing framework, Reserve Banks charge no fee for
collateralized daylight overdrafts, but charge a fee of 50 basis points
for uncollateralized daylight overdrafts.\8\
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\7\ See 73 FR 79109 (Dec. 24, 2008). These changes were not
fully implemented until 2011.
\8\ See section II.C of the PSR policy.
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Although the PSR policy's dual-pricing framework encourages
institutions to collateralize their daylight overdrafts, collateralized
capacity under the max cap program is not currently available for all
institutions with a positive net debit cap. Specifically, institutions
in the ``exempt-from-filing'' or ``de minimis'' cap categories (which
do not require a self-assessment) are ineligible to request
collateralized capacity under the max cap program. Likewise,
institutions with a voluntary zero net debit cap, and institutions that
the Reserve Banks have assigned a zero net debit cap, cannot request
collateralized capacity under the max cap program.\9\
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\9\ See section II.E.1 of the PSR policy.
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Further, obtaining collateralized capacity under the max cap
program requires institutions to undertake certain administrative steps
and analysis. First, institutions must provide a business case
outlining their need for collateralized capacity, and must submit a
board of directors resolution approving the collateralized capacity, at
least annually and whenever the institution modifies the amount of
requested collateralized capacity.\10\ Second, and as stated
previously, the max cap program is limited to institutions that have
already adopted a self-assessed net debit cap, which in turn requires
an institution to perform a self-assessment of its creditworthiness,
intraday funds management and control, customer credit policies and
controls, and operating controls and contingency procedures.\11\
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\10\ See id. Section II.E.2 of the PSR policy allows U.S.
branches or agencies of FBOs to use a streamlined procedure for
requesting a max cap. An FBO that uses the streamlined procedure is
not required to provide a business case for a max cap, nor is it
required to obtain a board of directors resolution authorizing a max
cap, so long as (a) the FBO has an FBO PSR capital category of
``highly capitalized'' and (b) the requested total capacity is 100
percent or less of the FBO's worldwide capital times the self-
assessed cap multiple. See section II.D.2 and n. 63 of the PSR
policy for a discussion of FBO PSR capital categories.
\11\ See section II.D.a of the PSR policy and supra note 4 which
discuss cap categories. The ``high,'' ``above average,'' and
``average'' cap categories require a self-assessment.
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B. The Overnight Overdrafts Policy

Intraday overdrafts occur when an institution has a negative
balance in its Federal Reserve account during the Fedwire[supreg] Funds
Service business day. Overnight overdrafts occur when an institution
has a negative account balance at the end of the Fedwire Funds Service
business day. While the PSR policy addresses daylight overdrafts, the
Overnight Overdrafts policy addresses overnight overdrafts.
To minimize Reserve Bank exposure to overnight overdrafts, the
Overnight Overdrafts policy imposes a penalty fee to discourage
institutions from incurring overnight overdrafts.\12\ If an institution
has a negative balance at the end of the business day, the Reserve
Banks apply an overnight overdraft penalty for a 24-hour period.
Currently, the penalty fee includes a multiday charge for overnight
overdrafts on calendar days occurring over weekends and holidays. The
Overnight Overdrafts policy contains a fee-escalation feature, whereby
the penalty fee increases by one percentage point for each overnight
overdraft after an institution's third overnight overdraft in a rolling
12-month period.
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\12\ See <a href="https://www.federalreserve.gov/paymentsystems/oo_policy.htm">https://www.federalreserve.gov/paymentsystems/oo_policy.htm</a>. The overnight overdraft penalty rate is equal to the
primary credit rate plus 4 percentage points (annual rate). There is
also a minimum penalty fee of 100 dollars per occasion, regardless
of the amount of the overnight overdraft.
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C. The FedNow Service and the PSR Policy

In 2019, the Board approved the FedNow Service, a new interbank
24x7x365 real-time gross settlement service with clearing functionality
to support end-to-end instant payments in the United States.\13\ The
FedNow Service will settle funds transfers between institutions through
debit and credit entries to balances in master accounts held at the
Reserve Banks. The new service will promote ubiquitous, safe, and
efficient instant payments in the United States.
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\13\ See 84 FR 39297 (Aug. 9, 2019). Current information on the
FedNow Service can be found at <a href="https://www.frbservices.org/financial-services/fednow">https://www.frbservices.org/financial-services/fednow</a>.
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Intraday credit from the Reserve Banks is currently available
during the 22-hour business day that is based on the Fedwire Funds
Service.\14\ As described in the Board's 2020 notice on FedNow Service
details, the FedNow Service will have a 24-hour business day, each day
of the week, including weekends and holidays.\15\ Access to intraday
credit will be available on a 24x7x365 basis to FedNow Service
participants under the same terms and conditions as are available for
other Federal Reserve services.
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\14\ See <a href="http://FRBservices.org">FRBservices.org</a>, Wholesale Services Operating Hours and
FedPayments[supreg] Manager Hours of Availability--Fedwire Funds
Service Schedule, <a href="https://www.frbservices.org/resources/financial-services/wires/operating-hours.html">https://www.frbservices.org/resources/financial-services/wires/operating-hours.html</a>.
\15\ 85 FR 48522, 48524 (Aug. 11, 2020).
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The close of the FedNow Service will align on all calendar days
with the close of the Fedwire Funds Service.\16\ If the close of the
Fedwire Funds Service is extended on any given day, the close of the
FedNow Service will also be extended to maintain alignment. Given the
continuous, 24-hour nature of the FedNow Service, the opening time will
occur immediately after the close of the FedNow Service. Under this
framework, an end-of-day balance will be calculated for each calendar
day, with transactions occurring on weekends and holidays recorded and
reported in the same way as transactions occurring on business
days.\17\ End-of-day balances will be reported on Federal Reserve
accounting records for all depository institutions using payment
services on each calendar day.
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\16\ Id. Both the Fedwire Funds and the FedNow Services will
close at 7:00:59 p.m. ET. On weekends and holidays, when the Fedwire
Funds Service is closed, the FedNow Service close will still align
with this closing time.
\17\ The Board expects that participating institutions will
record FedNow Service transactions in their customer accounts
according to their own business day and accounting conventions
(while still providing immediate access to funds received through
the FedNow Service).
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II. Proposed Changes and Board Response to Public Comments

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

[[Page 75256]]

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

A. Access to Collateralized Capacity

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

[[Page 75257]]

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

B. Clarifying Access to Uncollateralized Capacity

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

[[Page 75258]]

The Board also proposed to modify the PSR policy so that low
supervisory ratings of a parent or affiliate would not, in certain
cases, result in an institution losing its positive net debit cap.
Under the proposal, if an institution's holding company or affiliate is
assigned a low supervisory rating, the institution would be eligible to
request the ``exempt-from-filing,'' ``de minimis,'' or ``average'' cap
categories, but not the ``above average'' or ``high'' cap
categories.\29\ Additionally, the Board proposed that a Reserve Bank
would assign an institution a ``zero'' net debit cap if supervisory
information about the holding company or affiliated institutions
reveals material operating or financial weaknesses that pose
significant risks to the institution.
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\29\ For this purpose, a low supervisory rating for a holding
company would include a Deficient-2 rating in any of the components
of the LFI rating system or an RFI rating of 4 or 5. A low
supervisory rating for an affiliate institution would be defined as
a CAMELS rating of 4 or 5.
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The Board explained that the proposed changes would provide greater
certainty to institutions and would allow the Reserve Banks to tailor
intraday credit access in response to supervisory developments.
2. Public Comments and Board Response
Public Comments
Six commenters (two institutions, a payment services operator, and
three trade organizations) expressed support for the proposed changes
aimed at clarifying access to uncollateralized capacity. The commenters
stated that incorporating language from the Guide directly into the PSR
policy would help simplify and clarify the eligibility criteria for
requesting uncollateralized capacity from their Reserve Banks. The
commenters also supported the proposed change that would allow an
institution to maintain access to some uncollateralized capacity, up to
and including the ``average'' cap category, despite the low supervisory
ratings of a parent or affiliate. The commenters noted that providing a
path to some uncollateralized capacity for these institutions is a
welcome change that is likely to improve institutions' abilities to
manage short-term liquidity shortfalls. Three of these six commenters,
two trade organizations and an institution, urged the Board to ensure
that the proposed changes do not increase the regulatory oversight or
examination of institutions requesting uncollateralized capacity.
The Board did not receive any comments opposed to these aspects of
the proposal.
Board Response
The Board is adopting the changes related to uncollateralized
intraday credit substantially as proposed.\30\ The Board is clarifying
that Reserve Bank staff will continue to review supervisory information
about institutions, parents, and affiliates for purposes of determining
eligibility for uncollateralized capacity, but the changes related to
uncollateralized intraday credit are not intended to increase
regulatory or supervisory expectations.
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\30\ As noted above, the Board is making a technical change to
replace ``Domestic capital category'' with ``PCA designation'' in
the Eligibility Criteria for Requesting a Positive Net Debit Cap
table. See supra note 28.
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C. Changes To Support the Deployment of the FedNow Service

1. Proposed Changes
The Board proposed changes to the PSR policy to align the policy
with the deployment of the FedNow Service. In particular, the Board
proposed to revise section II.A of the PSR policy to define the
``business day'' as the 24-hour duration beginning immediately after
the previous day's regularly scheduled close of the Fedwire Funds
Service and the FedNow Service, and ending with the regularly scheduled
close of the Fedwire Funds Service and the FedNow Service.\31\
Currently, the PSR policy is based on the 22-hour business day of the
Fedwire Funds Service.
---------------------------------------------------------------------------

\31\ The Board also proposed adding a new posting rule to
account for FedNow Service transactions and modified an existing
posting rule to ensure that all credits and debits to an
institution's master account post at the close of the business day
before the next business day begins.
---------------------------------------------------------------------------

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

\32\ See section II.C of the PSR policy. See also Overview at p.
21-22. Institutions' daily daylight overdraft charges are summed
across a 10-business-day reserve maintenance period and then reduced
by a fee waiver of $150, which is primarily intended to minimize the
burden of the PSR policy on institutions that use small amounts of
intraday credit. See id.
\33\ In the request for comment, the impact analysis for the
proposed effective daily fee rate was erroneously rounded instead of
truncated to the seventh decimal. Since 2004, the effective daily
rates for both the regular daylight overdraft fee and the penalty
fee have been truncated at seven decimal places due to requirements
for Federal Reserve IT systems. See 69 FR 57917, 57923 (Sep. 28,
2004).
---------------------------------------------------------------------------

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

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

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[[Page 75259]]

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

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

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

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

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

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

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

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

[[Page 75260]]

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

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

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

D. Proposed Changes to the Overnight Overdrafts Policy

1. Proposed Changes
The Board proposed to incorporate the Overnight Overdrafts policy
as part III of the PSR policy. Under the proposal, an institution would
incur an overnight overdraft on each calendar day that its account
balance is negative at 7:00:59 p.m. ET, which is the newly proposed
close of the business day.
In addition, the Board proposed to eliminate the automatic multiday
charge for overnight overdrafts during weekends or holidays. Under the
proposal, all institutions, regardless of the Reserve Bank payment
services that they use, will incur an overnight overdraft penalty
charge for each calendar day, including weekends and holidays, that an
overnight overdraft is outstanding.
Finally, the Overnight Overdrafts policy includes a fee-escalation
feature where the penalty fee for an overnight overdraft increases by
one percentage point for each overnight overdraft after an institution
has already experienced three overnight overdrafts in a rolling 12-
month period. The Board proposed to eliminate the overnight overdraft
fee-escalation feature for all institutions. The Board explained that
the fee-escalation feature adds unnecessary complexity to the Overnight
Overdrafts policy and does not meaningfully reduce risk to the Reserve
Banks. In addition, the Board noted that the escalation feature is
rarely triggered since overnight overdrafts are uncommon, and the
Reserve Banks have other risk-mitigation tools for institutions that
incur frequent overnight overdrafts.
2. Public Comments and Board Response
Public Comments
Three trade organizations supported the proposed changes to the
Overnight Overdrafts policy. One of these commenters argued that
incorporating the Overnight Overdrafts policy as part III of the PSR
policy would underscore the close relationship between daylight
overdrafts and overnight overdrafts in an institution's account. The
remaining two commenters supported the elimination of the fee-
escalation feature of the Overnight Overdrafts policy.
A payment standards organization raised concerns with the proposal,
arguing that the proposed changes would disadvantage financial
institutions that do not participate in the FedNow Service because
institutions that do not participate in the FedNow Service would
continue to incur an automatic multiday charge for overnight overdrafts
occurring before a weekend or a holiday.
Board Response
The Board believes that overnight overdrafts pose a credit risk to
the Reserve Banks since there is no assurance that overnight overdrafts
are

[[Page 75261]]

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

E. Technical Changes to Text of the PSR Policy

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

\38\ First, the Board proposed to revise a sentence in n. 61 (n.
64 after amendments) to state that, because U.S. branches and
agencies are part of a single FBO family, all the U.S. offices of
FBOs (excluding U.S.-chartered bank subsidiaries and U.S.-chartered
Edge subsidiaries) should be treated as a consolidated family
relying on the FBO's capital. The footnote currently states that for
purposes of the PSR policy, the Reserve Banks evaluate U.S. branches
and agencies of an FBO as a family ``because these entities have no
existence separate from the FBO.'' Second, the Board proposed to
revise a sentence in n. 76 (n. 79 after amendments) of the PSR
policy, which discusses the streamlined procedure that highly
capitalized FBOs can use to request a max cap. The amendment would
clarify that the streamlined procedure is available to ``highly
capitalized'' FBOs, not ``well capitalized'' FBOs. The FBO PSR
capital category of ``highly capitalized'' is for FBOs while ``well
capitalized'' is the analogous PCA designation for domestic
institutions.
---------------------------------------------------------------------------

F. Other Comments Received

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

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

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

III. Regulatory Analyses

A. Regulatory Flexibility Act

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

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

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

[[Page 75262]]

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

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

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

B. Competitive Impact Analysis

When considering changes to an existing service, the Board conducts
a competitive impact analysis to determine whether there will be a
direct and material adverse effect on the ability of other service
providers to compete effectively with the Federal Reserve in providing
similar services due to differing legal powers or the Federal Reserve's
dominant market position deriving from such legal differences.\43\
---------------------------------------------------------------------------

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

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

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

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

C. Paperwork Reduction Act

In accordance with section 3512 of the Paperwork Reduction Act of
1995 (44 U.S.C. 3501-3521) (PRA), the Board may not conduct or sponsor,
and a respondent is not required to respond to, an information
collection unless it displays a currently valid Office of Management
and Budget (OMB) control number. The Board reviewed the PSR policy
changes being adopted under the authority delegated to the Board by the
OMB and concluded that the proposed changes impact the information
collection under OMB control number 7100-0217 (FR 2226).
The Board received no comments on the PRA analysis in the proposal.
Final Approval Under OMB Delegated Authority of the Extension for Three
Years, With Revision, of the Following Information Collection
Title of Information Collection: Report of Net Debit Cap.
Collection Identifier: FR 2226.
OMB Control Number: 7100-0217.
Frequency: Annually.
Respondents: Depository institutions.
Estimated number of respondents: De Minimis Cap: Non-FBOs, 893
respondents and FBOs, 18 respondents; Self-Assessment Cap: Non-FBOs,
106 respondents and FBOs, 9 respondents; and Maximum Daylight Overdraft
Capacity, 59 respondents.
Estimated average hours per response: De Minimis Cap--Non-FBOs, 1
hour and FBOs, 1.5 hour; Self-Assessment Cap--Non-FBOs, 1 hour and
FBOs, 1.5 hours, and Maximum Daylight Overdraft Capacity, 1 hour.
Estimated annual burden hours: De Minimis Cap: Non-FBOs, 893 hours
and

[[Page 75263]]

FBOs, 27 hours; Self-Assessment Cap: Non-FBOs, 106 hours and FBOs, 14
hours; and Maximum Daylight Overdraft Capacity, 59 hours.
General description: The Report of Net Debit Cap comprises three
resolutions, which are filed by an institution's board of directors
depending on its needs. The first resolution is used to establish a de
minimis net debit cap and the second resolution is used to establish a
self-assessed net debit cap.\45\ The third resolution is used to
establish simultaneously a self-assessed net debit cap and maximum
daylight overdraft capacity. Federal Reserve Banks collect these data
annually to provide information that is essential for their
administration of the Board's Payment System Risk (PSR) policy. The
reporting panel includes all depository institutions with access to the
discount window that are eligible to request intraday credit.
---------------------------------------------------------------------------

\45\ Institutions use these two resolutions to establish a
capacity for daylight overdrafts above the lesser of $10 million or
20 percent of the institution's capital measure. Financially-healthy
U.S. chartered institutions that rarely incur daylight overdrafts in
excess of the lesser of $10 million or 20 percent of the
institution's capital measure do not need to file board of directors
resolutions or self-assessments with their Reserve Bank.
---------------------------------------------------------------------------

Current Actions: Currently, institutions with a self-assessed net
debit cap may file the third resolution in order to obtain
collateralized capacity under the max cap program. The changes being
adopted to the PSR policy expand access to collateralized capacity
under the max cap program to include all domestic institutions with a
PCA designation of undercapitalized, adequately capitalized, or well
capitalized. The changes also expand access to collateralized capacity
under the max cap program to include all FBOs with an FBO PSR category
of undercapitalized, sufficiently capitalized, or highly capitalized.
Finally, the changes eliminate the requirements that an institution
provide (i) a business case outlining its need for collateralized
capacity and (ii) an annual board of directors resolution approving its
collateralized capacity. In order the facilitate these changes to the
PSR policy, the Board is amending the requirements associated with the
third resolution so that an eligible institution can request
collateralized capacity regardless of whether the institution has a
positive net debit cap. The changes will not increase the estimated
average hours per response to FR 2226 but will expand the estimated
number of respondents requesting collateralized capacity under the max
cap program.

IV. Federal Reserve Policy on Payment System Risk

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

Federal Reserve Policy on Payment System Risk

Revisions to Section II.A of the PSR Policy

The Board will revise Section II.A of the PSR policy as follows:

A. Daylight Overdraft Definition and Measurement

A daylight overdraft occurs when an institution's Federal Reserve
account is in a negative position during the business day.\33\ The
Reserve Banks use an ex post system to measure daylight overdrafts in
institutions' Federal Reserve accounts. Under this ex post measurement
system, certain transactions, including Fedwire funds transfers, FedNow
funds transfers, book-entry securities transfers, and net settlement
transactions, are posted as they are processed during the business day.
Other transactions, including ACH and check transactions, are posted to
institutions' accounts according to a defined schedule. The following
table presents the schedule used by the Federal Reserve for posting
transactions to institutions' accounts for purposes of measuring
daylight overdrafts.
\33\ For purposes of measuring daylight overdrafts, the business
day is the 24-hour period that begins immediately after the regularly-
scheduled close of the Fedwire Funds Service (on days when the Fedwire
Funds Service is open) and the FedNow Service (on all days, including
weekends and holidays).
Procedures for Measuring Daylight Overdrafts \34\
Opening Balance (Previous Business Day's Closing Balance)
Post throughout the business day:

+/- FedNow funds transfers
+/- Fedwire funds transfers \35\
+/- Fedwire book-entry securities transfers
+/- National Settlement Service entries.
+ Fedwire book-entry interest and redemption payments on securities
that are not obligations of, or fully guaranteed as to principal and
interest by, the United States \36\
+ Electronic payments for matured coupons and definitive securities
that are not obligations of, or fully guaranteed as to principal and
interest by, the United States.\37\

\34\ This schedule of posting rules does not affect the
overdraft restrictions and overdraft measurement provisions for
nonbanks established by the Competitive Equality Banking Act of 1987
and the Board's Regulation Y (12 CFR 225.52).
\35\ Funds transfers that the Reserve Banks function for certain
international organizations using internal systems other than
payment processing systems such as Fedwire will be posted throughout
the business day for purposes of measuring daylight overdrafts.
\36\ The GSEs include Federal National Mortgage Association
(Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie
Mac), entities of the Federal Home Loan Bank System (FHLBS), the
Farm Credit System, the Federal Agricultural Mortgage Corporation
(Farmer Mac), the Student Loan Marketing Association (Sallie Mae),
the Financing Corporation, and the Resolution Funding Corporation.
The international organizations include the World Bank, the Inter-
American Development Bank, the Asian Development Bank, and the
African Development Bank. The Student Loan Marketing Association
Reorganization Act of 1996 requires Sallie Mae to be completely
privatized by 2008; however, Sallie Mae completed privatization at
the end of 2004. The Reserve Banks no longer act as fiscal agents
for new issues of Sallie Mae securities, and Sallie Mae is not
considered a GSE.
The term ``interest and redemption payments'' refers to payments
of principal, interest, and redemption on securities maintained on
the Fedwire Securities Service.
The Reserve Banks will post these transactions, as directed by
the issuer, provided that the issuer's Federal Reserve account
contains funds equal to or in excess of the amount of the interest
and redemption payments to be made. In the normal course, if a
Reserve Bank does not receive funding from an issuer for the
issuer's interest and redemption payments by the established cut-off
hour of 4:00 p.m. eastern time on the Fedwire Securities Service,
the issuer's payments will not be processed on that day.
\37\ Electronic payments for credits on these securities will
post according to the posting rules for the mechanism through which
they are processed, as outlined in this policy. However, the
majority of these payments are made by check and will be posted
according to the established check posting rules as set forth in
this policy.
* * * * *
Post at the close of the Fedwire Funds Service and the FedNow
Service \51\

+/- All other transactions. These transactions include the following:
currency and coin shipments; noncash collection; term-deposit
settlements; Federal Reserve Bank checks presented after 3:00 p.m.
eastern time but before 3:00 p.m. local time; foreign check
transactions; small-dollar credit corrections and adjustments; term
deposit settlements; and all debit corrections and adjustments.
Discount-window loans

[[Page 75264]]

and repayments are normally posted after the close of the Fedwire Funds
Service as well; however, in unusual circumstances a discount window
loan may be posted earlier in the day with repayment 24 hours later, or
a loan may be repaid before it would otherwise become due.

\51\ The posting of transactions that occur during extensions of
the Fedwire Funds Service and the FedNow Service will be backdated
to the regularly scheduled close of the Fedwire Funds Service and
the FedNow Service.
* * * * *

Revisions to Section II.C of the PSR Policy

The Board will revise section II.C, paragraphs 3 and 4 of the
``Federal Reserve Policy on Payment System Risk'' as follows:

C. Pricing

* * * * *
Daylight overdraft fees for uncollateralized overdrafts (or the
uncollateralized portion of a partially collateralized overdraft) are
calculated using an annual rate of 50 basis points, quoted on the basis
of a 24-hour day and a 360-day year. The effective daily rate equals
the annual rate divided by 360.\57\ An institution's daily daylight
overdraft charge is equal to the effective daily rate multiplied by the
institution's average daily uncollateralized daylight overdraft.
An institution's average daily uncollateralized daylight overdraft
is calculated by dividing the sum of its negative uncollateralized
Federal Reserve account balances at the end of each minute of the
regularly-scheduled business day by the total number of minutes in the
24-hour business day. A negative uncollateralized Federal Reserve
account balance is calculated by subtracting the unencumbered, net
lendable value of collateral pledged from the total negative Federal
Reserve account balance at the end of each minute. Each positive end-
of-minute balance in an institution's Federal Reserve account is set to
equal zero. Fully collateralized end-of-minute negative balances are
similarly set to zero.

\57\ The effective daily daylight-overdraft rate is truncated to
0.0000138.
* * * * *

Revisions to Section II.D of the PSR Policy

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

D. Net Debit Caps (Uncollateralized Intraday Credit Capacity)

Each institution incurring uncollateralized daylight overdrafts in
its Federal Reserve account must adopt a net debit cap, that is, a
ceiling on the total uncollateralized daylight overdraft position that
it can incur during any given day. An institution's cap category and
capital measure determine the size of its net debit cap. Specifically,
the net debit cap is calculated as an institution's cap multiple times
its capital measure:

net debit cap =
cap multiple x capital measure

Cap categories and their associated cap levels, set as multiples of
an institution's capital measure, are listed below:

Net Debit Cap Multiples
------------------------------------------------------------------------
Cap category Cap multiple
------------------------------------------------------------------------
High...................................... 2.25.
Above average............................. 1.875.
Average................................... 1.125.
De minimis................................ 0.4.
Exempt-from-filing \60\................... $10 million or 0.20.
Zero...................................... 0.
------------------------------------------------------------------------
\60\ The net debit cap for the exempt-from-filing category is equal to
the lesser of $10 million or 0.20 multiplied by the capital measure.

Pledging collateral does not increase an institution's net debit
cap, although certain institutions may be eligible to obtain additional
collateralized capacity in excess of their net debit caps (see section
II.E). For the treatment of overdrafts that exceed the net debit cap,
see section II.G.
While capital measures differ, the net debit cap provisions of this
policy apply similarly to foreign banking organizations (FBOs) and to
U.S. institutions. Consistent with practices for U.S.-chartered
depository institutions, the Reserve Banks will advise home-country
supervisors of the daylight overdraft capacity of U.S. branches and
agencies of FBOs under their jurisdiction, as well as of other
pertinent information related to the FBOs' caps. The Reserve Banks will
also provide information on the daylight overdrafts in the Federal
Reserve accounts of FBOs' U.S. branches and agencies in response to
requests from home-country supervisors.
1. Eligibility
An institution must have regular access to the discount window in
order to adopt a net debit cap greater than zero. Granting a net debit
cap, or any extension of intraday credit, to an institution is at the
discretion of the Reserve Bank. As detailed in the following matrix, an
institution's eligibility to adopt and maintain a positive net debit
cap depends on the institution's creditworthiness as determined by (1)
its Prompt Corrective Action (PCA) designation \61\ or FBO PSR capital
category,\62\ and (2) the supervisory rating.

\61\ An insured depository institution is (1) ``well
capitalized'' if it significantly exceeds the required minimum level
for each relevant capital measure, (2) ``adequately capitalized'' if
it meets the required minimum level for each relevant capital
measure, (3) ``undercapitalized'' if it fails to meet the required
minimum level for any relevant capital measure, (4) ``significantly
undercapitalized'' if it is significantly below the required minimum
level for any relevant capital measure, or (5) ``critically
undercapitalized'' if it fails to meet any leverage limit (the ratio
of tangible equity to total assets) specified by the appropriate
federal banking agency, in consultation with the FDIC, or any other
relevant capital measure established by the agency to determine when
an institution is critically undercapitalized (12 U.S.C. 1831o).
\62\ The four FBO PSR capital categories for FBOs are ``highly
capitalized,'' ``sufficiently capitalized,'' ``undercapitalized,''
and ``intraday credit ineligible.'' To determine whether it is
highly capitalized or sufficiently capitalized, an FBO should
compare its risk-based capital ratios with the corresponding ratios
in Regulation H for well-capitalized and adequately capitalized
banks. 12 CFR 208.43(b). Additionally, an FBO must have a leverage
ratio of 4 percent or 3 percent (calculated under home-country
standards) to qualify as, respectively, highly capitalized or
sufficiently capitalized. To determine whether it is
undercapitalized, an FBO would compare its risk-based capital ratios
with the corresponding ratios in Regulation H. Additionally, an FBO
would be deemed undercapitalized if its home-country leverage ratio
is less than 3 percent. Finally, to determine whether it is intraday
credit ineligible, an FBO should compare its risk-based capital
ratios with the corresponding ratios in Regulation H for
significantly undercapitalized banks. Additionally, an FBO would be
deemed intraday credit ineligible if its home-country leverage ratio
is less than 2 percent.

[[Page 75265]]

Eligibility Criteria for Requesting a Positive Net Debit Cap
----------------------------------------------------------------------------------------------------------------
Supervisory rating \63\
PCA designation/ FBO PSR capital -------------------------------------------------------------------------------
category Marginal or
Strong Satisfactory Fair unsatisfactory
----------------------------------------------------------------------------------------------------------------
Well capitalized/Highly Eligible.......... Eligible.......... Eligible.......... Ineligible (Zero
capitalized. net debit cap).
Adequately capitalized/ Eligible.......... Eligible.......... Eligible.......... Ineligible (Zero
Sufficiently capitalized. net debit cap).
Undercapitalized................ May be eligible May be eligible Ineligible (Zero Ineligible (Zero
subject to a full subject to a full net debit cap). net debit cap).
assessment of assessment of
creditworthiness. creditworthiness.
Significantly or critically Ineligible (Zero Ineligible (Zero Ineligible (Zero Ineligible (Zero
undercapitalized/Intraday net debit cap). net debit cap). net debit cap). net debit cap).
credit ineligible.
----------------------------------------------------------------------------------------------------------------
\63\ Supervisory ratings, such as the Uniform Financial Institution Rating System (CAMELS) and the RFI Rating
System, are generally assigned on a scale from 1 to 5, with 1 being the strongest rating. Thus, a supervisory
rating of 1 is considered Strong, a rating of 2 is considered Satisfactory, a rating of 3 is considered Fair,
a rating of 4 is considered Marginal, and a rating of 5 is considered Unsatisfactory. An institution will not
be eligible for uncollateralized capacity if a supervisory agency assigns a Marginal or Unsatisfactory
supervisory rating to the institution. If an institution's holding company has been assigned a Deficient-2
rating in any of the components of the Large Financial Institution (LFI) rating system or an RFI rating of 4
or 5, the institution will not be eligible to request the ``above average'' and ``high'' self-assessed cap
categories but may be eligible for a lower cap category. Similarly, if an institution's affiliates are
assigned a Marginal or Unsatisfactory supervisory rating, the institution will not be eligible to request the
``above average'' and ``high'' self-assessed cap categories but may be eligible for a lower cap category.
Reserve Banks will assign an institution a ``zero'' net debit cap if supervisory information about the holding
company and affiliated institutions reveals material operating or financial weaknesses that pose significant
risks to the institution.

As described further in section II.D.2.a, an institution seeking to
establish a net debit cap category of high, above average, or average
must perform a self-assessment of its own creditworthiness, intraday
funds management and control, customer credit policies and controls,
and operating controls and contingency procedure. An institution that
performs a self-assessment will be deemed ineligible for a positive net
debit cap if its self-assessment results in the lowest possible rating
for any one of the four components of the self-assessment process.
2. Cap Categories
* * * * *
a. Self-Assessed
In order to establish a net debit cap category of high, above
average, or average, an institution must perform a self-assessment of
its own creditworthiness, intraday funds management and control,
customer credit policies and controls, and operating controls and
contingency procedures.\64\ For domestic institutions, the assessment
of creditworthiness is based on the institution's supervisory rating
and PCA designation.\65\ For U.S. branches and agencies of FBOs that
are based in jurisdictions that have implemented capital standards
substantially consistent with those established by the Basel Committee
on Banking Supervision, the assessment of creditworthiness is based on
the institution's supervisory rating and its FBO PSR capital
category.\66\ An institution may perform a full assessment of its
creditworthiness in certain limited circumstances--for example, if its
condition has changed significantly since its last examination or if it
possesses additional substantive information regarding its financial
condition. Additionally, U.S. branches and agencies of FBOs based in
jurisdictions that have not implemented capital standards substantially
consistent with those established by the Basel Committee on Banking
Supervision are required to perform a full assessment of
creditworthiness to determine their ratings for the creditworthiness
component. An institution performing a self-assessment must also
evaluate its intraday funds-management procedures and its procedures
for evaluating the financial condition of and establishing intraday
credit limits for its customers. Finally, the institution must evaluate
its operating controls and contingency procedures to determine if they
are sufficient to prevent losses due to fraud or system failures. The
Guide includes a detailed explanation of the self-assessment process. *
* *

\64\ This assessment should be done on an individual-institution
basis, treating as separate entities each commercial bank, each Edge
corporation (and its branches), each thrift institution, and so on.
An exception is made in the case of U.S. branches and agencies of
FBOs. Because these entities are part of a single FBO family, all
the U.S. offices of FBOs (excluding U.S.-chartered bank subsidiaries
and U.S.-chartered Edge subsidiaries) should be treated as a
consolidated family relying on the FBO's capital.
\65\ See n. 61 supra.
\66\ See n. 62 supra.
* * * * *
d. Zero
Some institutions that could obtain positive net debit caps choose
to have zero caps. Often these institutions have very conservative
internal policies regarding the use of Federal Reserve intraday credit.
If an institution that has adopted a zero cap incurs a daylight
overdraft, the Reserve Bank counsels the institution and may monitor
the institution's activity in real time and reject or delay certain
transactions that would cause an overdraft. If the institution
qualifies for a positive cap, the Reserve Bank may suggest that the
institution adopt an exempt-from-filing cap or file for a higher cap if
the institution believes that it will continue to incur daylight
overdrafts or overdrafts in excess of its assigned cap limit.
In addition, a Reserve Bank may assign an institution a zero net
debit cap. Institutions that may pose special risks to the Reserve
Banks, such as those without regular access to the discount window,
those incurring daylight overdrafts in violation of this policy, those
that are ineligible for intraday credit based on their supervisory
rating and PCA designation/FBO PSR capital category (see section II.A),
or those that are otherwise in weak financial condition are generally
assigned a zero cap (see section II.F). Recently chartered institutions
may also be assigned a zero net debit cap.
Certain institutions with zero caps, including institutions that
have been involuntarily assigned a zero cap by a Reserve Bank, may be
eligible to request collateralized capacity from their Reserve Bank
(see sections II.E). * * *
* * * * *

Revisions to Section II.E of the PSR policy

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

[[Page 75266]]

E. Collateralized Intraday Credit Capacity

Subject to the approval of its administrative Reserve Bank, an
eligible institution may pledge collateral to secure collateralized
daylight overdraft capacity in addition to uncollateralized capacity
from its net debit cap.\74\ The resulting combination of
uncollateralized and collateralized capacity is known as the maximum
daylight overdraft capacity (max cap) and is defined as follows:

maximum daylight overdraft capacity =
net debit cap +
collateralized capacity.\75\

Once approved, the Reserve Bank will monitor the institution to
ensure that it does not exceed its max cap. Pledging less collateral
reduces an institution's effective maximum daylight overdraft capacity
level, but pledging more collateral does not increase the maximum
daylight overdraft capacity above the approved max cap level.
1. Eligibility
An institution that wishes to expand its daylight overdraft
capacity by pledging collateral should consult with its administrative
Reserve Bank. A domestic institution is eligible to request
collateralized intraday credit if its PCA designation is
``undercapitalized,'' ``adequately capitalized,'' or ``well
capitalized.'' \76\ Similarly, an FBO is eligible to request
collateralized intraday credit if its FBO PSR capital category is
``undercapitalized,'' ``sufficiently capitalized,'' or ``highly
capitalized.'' \77\ Provided that it meets these capitalization
requirements, an institution may be eligible to request collateralized
capacity even if the institution is not eligible to adopt a positive
net debit cap (see section II.D.1).

\74\ The administrative Reserve Bank is responsible for the
administration of Federal Reserve credit, reserves, and risk-
management policies for a given institution. All collateral must be
acceptable to the administrative Reserve Bank. The Reserve Bank may,
at its discretion, accept securities in transit on the Fedwire
Securities Service as collateral to support the maximum daylight
overdraft capacity level. Collateral eligibility and margins are the
same for PSR policy purposes as for the discount window. See <a href="http://www.frbdiscountwindow.org/">http://www.frbdiscountwindow.org/</a> for information.
\75\ Collateralized capacity, on any given day, equals the
amount of collateral pledged to the Reserve Bank, not to exceed the
difference between the institution's maximum daylight overdraft
capacity level and its net debit cap in the given reserve
maintenance period.
\76\ See n. 61, supra.
\77\ See n. 62, supra.
2. General Procedure for Requesting Collateralized Capacity
If an institution is requesting collateralized capacity for the
first time, it must submit a resolution from its board of directors
indicating its board's approval of the requested max cap. Increases to
collateralized capacity previously approved by Reserve Banks will also
require a board of directors resolution. In most cases, an institution
will not have to provide to a Reserve Bank a business case justifying
its request for collateralized capacity. However, an institution must
provide a business-case justification if:
<bullet> The institution requests a max cap in excess of its
capital measure multiplied by 2.25; or
<bullet> The administrative Reserve Bank exercises discretion to
require that the institution submit a business-case justification due
to recent developments in the institution's condition.
Once a Reserve Bank has approved an institution's collateralized
capacity, the collateralized capacity will remain in place, without the
need for further action by the institution, provided that the
institution maintains the eligibility standards outlined above.
3. Streamlined Procedure for Certain FBOs
An FBO that is highly capitalized \78\ and has a self-assessed net
debit cap may request from its Reserve Bank a streamlined procedure to
obtain a maximum daylight overdraft capacity. These FBOs are not
required to provide documentation of the business case or obtain a
board of directors resolution for collateralized capacity in an amount
that exceeds its current net debit cap (which is based on 10 percent
worldwide capital times its cap multiple), as long as the requested
total capacity is 100 percent or less of worldwide capital times a
self-assessed cap multiple.\79\ In order to ensure that intraday
liquidity risk is managed appropriately and that the FBO will be able
to repay daylight overdrafts, eligible FBOs under the streamlined
procedure will be subject to an initial and periodic review of
liquidity plans that are analogous to the liquidity reviews undergone
by U.S. institutions.\80\ If an eligible FBO requests capacity in
excess of 100 percent of worldwide capital times the self-assessed cap
multiple, it would be subject to the general procedure.

\78\ See n. 62, supra.
\79\ For example, an FBO that is highly capitalized is eligible
for uncollateralized capacity of 10 percent of worldwide capital
times the cap multiple. The streamlined collateralized capacity
procedure would provide such an institution with additional
collateralized capacity of 90 percent of worldwide capital times the
cap multiple. As noted above, FBOs report their worldwide capital on
the Annual Daylight Overdraft Capital Report for U.S. Branches and
Agencies of Foreign Banks (FR 2225).
\80\ The liquidity reviews will be conducted by the
administrative Reserve Bank, in consultation with each FBO's home
country supervisor.
* * * * *

Revisions to Section II.F of the PSR policy

The Board will revise section II.F, paragraphs 3 and 4 of the
``Federal Reserve Policy on Payment System Risk'' as follows:

F. Special Situations

Certain institutions are subject to a daylight-overdraft penalty
fee levied against the average daily daylight overdraft incurred by the
institution. These include Edge and agreement corporations, bankers'
banks that are not subject to reserve requirements, and limited-purpose
trust companies. The annual rate used to determine the daylight-
overdraft penalty fee is equal to the annual rate applicable to the
daylight overdrafts of other institutions (50 basis points) plus 100
basis points. The effective daily overdraft penalty rate equals the
annual penalty rate divided by 360.\81\ The daylight-overdraft penalty
rate applies to the institution's daily average daylight overdraft in
its Federal Reserve account. The daylight-overdraft penalty fee for
these institutions is charged in lieu of, not in addition to, the
daylight overdraft fee that applies to other institutions.

\81\ The effective daily daylight-overdraft penalty rate is
truncated to 0.0000416.
* * * * *
The Board will modify and add the Policy on Overnight Overdrafts as
part III to the PSR policy as follows:

Part III. Policy on Overnight Overdrafts

An overnight overdraft is a negative balance in a Federal Reserve
account at the close of the business day. The Board expects
institutions to avoid overnight overdrafts.
To minimize the Reserve Banks' exposure to overnight overdrafts,
which are not always collateralized, the Board authorizes Reserve Banks
to discourage depository institutions from incurring overnight
overdrafts by charging a penalty fee. Institutions that do not
extinguish their daylight overdrafts and incur overnight overdrafts are
subject to ex post counseling in addition to a penalty fee.

[[Page 75267]]

The Board establishes the following penalty rate structure for
overnight overdrafts:
1. An overnight overdraft penalty rate of the primary credit rate
plus 4 percentage points (annual rate).
2. A minimum penalty fee of 100 dollars, regardless of the amount
of the overnight overdraft. The minimum fee is administered per each
occasion.
3. A charge for each calendar day (including weekends and holidays)
that an overnight overdraft is outstanding.

\92\ See n. 33, which defines the term ``business day'' for this
purpose.
* * * * *

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

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