Report of Net Debit Cap

Guide to the Federal Reserve’s
Payments System Risk Policy
on Daylight Credit

Federal Reserve System
July 2007

This publication is available at www.federalreserve.gov/paymentsystems/psr/relpol.htm

i
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Table of Contents
Page
Preface......................................................................................................................................................1
I. Introduction .........................................................................................................................................2
Policy History .....................................................................................................................................2
Objectives of the PSR Policy..............................................................................................................4
II. Daylight Overdraft Capacity ............................................................................................................7
Net Debit Caps....................................................................................................................................7
Cap Categories ....................................................................................................................................8
Collateralized Daylight Overdraft Capacity .....................................................................................11
Role of an Institution’s Board of Directors.......................................................................................13
Cap Resolutions ................................................................................................................................14
Confidentiality of Cap Information ..................................................................................................15
III. Daylight Overdraft Monitoring and Management .....................................................................16
Daylight Overdraft Measurement .....................................................................................................16
Monitoring Compliance with the PSR Policy...................................................................................17
Real-time Monitoring and the Account Balance Monitoring System...............................................18
IV. Daylight Overdraft Fees .................................................................................................................21
Calculation of Daylight Overdraft Charges ......................................................................................21
Billing and Adjustments....................................................................................................................23
V. Special Situations .............................................................................................................................24
U.S. Branches and Agencies of Foreign Banks ................................................................................24
Nonbank Banks and Industrial Banks...............................................................................................26
Institutions Subject to Daylight Overdraft Penalty Fees...................................................................26
VI. Self-Assessment Procedures...........................................................................................................29
Creditworthiness Component............................................................................................................29
Intraday Funds Management and Control.........................................................................................34
Customer Credit Policies and Controls.............................................................................................36
Operating Controls and Contingency Procedures.............................................................................40
Overall Self-Assessment Rating .......................................................................................................43
APPENDIXES .......................................................................................................................................44
Self-Assessment Worksheets ............................................................................................................44
Sample Letters and Resolutions........................................................................................................76
Capital Measures...............................................................................................................................85
GLOSSARY...........................................................................................................................................87

Preface 1
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Preface
The Guide to the Federal Reserve’s Payments System Risk Policy on Daylight Credit was
developed to assist depository institutions in complying with the Federal Reserve Policy on
Payments System Risk (PSR policy).1 The PSR policy was developed to control and reduce
risks in the payments system, including institutions’ use of Federal Reserve intraday credit,
commonly referred to as “daylight credit” or “daylight overdrafts.”
The guide contains detailed information on the steps necessary to comply with part II of
the PSR policy, which outlines the Federal Reserve’s intraday credit policies. Any institution
using Federal Reserve intraday credit, regardless of the amount, should have the capability to
monitor its Federal Reserve account balance on an intraday basis and should understand the risks
inherent in the provision of payment services generally.
Users of the guide should be aware that the information it contains is based on the PSR
policy effective at the time of publication. If the Board modifies the PSR policy, the revised
policy will supersede information in the guide until it can be updated accordingly.

1

Available at www.federalreserve.gov/paymentsystems/psr/policy.pdf

Introduction 2
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I. Introduction
The Federal Reserve Board developed the PSR policy to address the risks that payment
systems present to the Federal Reserve Banks, to the banking system, and to other sectors of the
economy. The Board’s daylight credit policy objective is to attain an efficient balance among the
costs and risks associated with the provision of Federal Reserve intraday credit, including the
comprehensive costs and risks to the private sector of managing Federal Reserve account
balances, and the benefits of intraday liquidity.
An integral component of the PSR policy is a program to control institutions’ use of
intraday Federal Reserve credit, or “daylight overdrafts,” which is the primary focus of this
document. A daylight overdraft occurs when an institution’s Federal Reserve account is in a
negative position at any point during the business day.2
A. Policy History
The Federal Reserve first published a policy on risks in large-dollar payment systems in
1985. This policy required all institutions incurring daylight overdrafts in their Federal Reserve
accounts as a result of Fedwire funds transfers to establish a maximum limit, or net debit cap, on
those overdrafts.3
In subsequent years, the Federal Reserve expanded the original PSR policy by addressing
risk controls for other payment types, including automated clearinghouse (ACH) transfers and
book-entry securities transfers. The PSR policy also has been expanded to address risk controls
for other payment systems, including large-dollar multilateral netting systems and certain private
securities clearing and settlement systems. In addition, the Federal Reserve made several
modifications to the original PSR program that include reductions to net debit cap levels, the
creation of an exempt status for institutions that incur only minimal daylight overdrafts, changes
to the calculation of foreign banks’ U.S. capital equivalency, and, perhaps most notably, the
implementation of daylight overdraft fees.
In 1989, the Board requested comment on a proposed policy change that would assess a
fee of 60 basis points, phased in over three years, for an institution’s average daily overdrafts in
excess of a deductible of 10 percent of the institution’s risk-based capital. In October 1992, the
Board approved charging a fee for daylight overdrafts, which was to be phased in as 24 basis
points in 1994, 48 basis points in 1995, and 60 basis points in 1996. The purpose of the fee was
to induce behavior that would reduce risk and increase efficiency in the payments system. At the
same time, to facilitate the pricing of daylight overdrafts, the Board modified its method of
measuring daylight overdrafts to reflect better the timing of transactions affecting an institution’s
2

In the PSR policy, the term “institution” refers to entities defined as “depository institutions” in 12 U.S.C.
461(b)(1)(A), U.S. branches and agencies of foreign banking organizations, Edge and agreement corporations,
bankers’ banks, limited-purpose trust companies, government-sponsored enterprises, and international organizations,
unless the3 context indicates a different reading.
The Fedwire Funds Service is a large-dollar electronic payment system owned and operated by the
Federal Reserve Banks. Fedwire is a registered service mark of the Federal Reserve Banks.

Introduction 3
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intraday Federal Reserve account balance.4 This measurement method incorporates specific
account posting times for different types of transactions.
In March 1995, the Board decided to raise the daylight overdraft fee to 36 basis points
instead of 48 basis points. Because aggregate daylight overdrafts fell approximately 40 percent
after the initial introduction of fees, the Board was concerned that raising the fee to 48 basis
points could produce market effects contrary to the objectives of the risk-control program. The
Board believed, however, that an increase in the overdraft fee was needed to provide additional
incentives for institutions to reduce overdrafts related to funds transfers. The Board stated it
would evaluate further fee increases two years after it could assess the effects of the 1995 fee
increase.
In 2000, recognizing its obligation to review fees and to consider changes that had
occurred in the banking, payments, and regulatory environment, the Board conducted a broad
review of the Federal Reserve’s daylight credit policies. The Board evaluated its daylight credit
policies and determined that these policies appeared to be generally effective in controlling risk
to the Federal Reserve and in creating incentives for institutions to manage their intraday credit
exposures. While the Board determined that the policy was generally effective, it identified
growing liquidity pressures among certain payments system participants. Specifically, the Board
learned that a small number of financially healthy institutions regularly found their net debit caps
to be constraining, causing them to delay sending payments and, in some cases, to turn away
business.
The Board’s broad review of its daylight credit policies concluded in December 2001
with its approval of a policy that allows certain institutions to pledge collateral to their
administrative Reserve Bank (ARB) to secure daylight overdraft capacity in excess of their net
debit caps, subject to Reserve Bank approval.5 This policy also contained changes to the
calculation of net debit caps for U.S. branches and agencies of foreign banks. These changes
allowed certain foreign banks to access increased amounts of daylight credit.
In September 2004, the Board announced two policy revisions pertaining to governmentsponsored enterprises (GSEs) and certain international organizations. At that time, Reserve
Banks processed and posted interest and redemption payments on securities issued by these
entities by 9:15 a.m. eastern time each day, even if the issuer had not fully funded its payments.
Effective July 20, 2006, the Reserve Banks release interest and redemption payments on
securities issued by GSEs and certain international organizations only when the issuer’s Reserve
4

Prior to the Board’s modification of the daylight overdraft posting rules, Fedwire funds and government
securities transfers were posted to institutions’ Federal Reserve accounts as they were processed during the business
day (as they still are today). The net of all automated clearinghouse (ACH) transactions was posted as if the
transactions occurred at the opening of business, regardless of whether the net was a debit or credit balance. All
other or “nonwire” activity was netted at the end of the business day, and if the net balance was a credit, the credit
amount was added to the opening balance. If the net balance was a debit, the debit amount was deducted from the
closing balance. Under this method, an institution could use all of its nonwire net credits to offset any Fedwire
funds or government securities debits during the day but postpone the need to cover nonwire net debits until the
close of the
day.
5
The administrative Reserve Bank is responsible for the administration of Federal Reserve credit, reserves,
and risk-management policies for a given depository institution or other legal entity.

Introduction 4
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Bank account contains sufficient funds to cover the payments. Additionally, the policy change
aligned the treatment of GSEs and international organizations with other account holders that do
not have regular access to the discount window by applying penalty fees to any daylight
overdrafts these institutions incur.
In November 2004, the Board approved changes to the PSR policy addressing risk
management in payment and securities settlement systems. The Board adopted the Core
Principles for Systemically Important Payment Systems (Core Principles) and the
Recommendations for Securities Settlement Systems (RSSS) as the minimum standards for
systemically important payment and securities settlement systems, respectively.6 At the same
time, the Board revised its general risk-management expectations for all systems subject to the
policy. The Board also expanded the scope of the policy to cover Federal Reserve payments and
securities settlement systems such as the Fedwire Funds Service and FedACH. The action also
modified the introduction to the policy, reordered the first two sections of the policy, and deleted
the third section of the policy containing guidance on the use of rollovers and continuing
contracts in the federal funds market. The Board determined that institutions have the
appropriate incentives to incorporate the guidance into their daylight credit procedures and that
specific guidance is no longer necessary.
In January 2007, the Board approved changes to part I of the PSR policy that revised the
expectations for systemically important payments and settlement systems subject to the policy
and updated and clarified the policy with regard to central counterparties. Under the revised
policy, the Board adopted the Recommendations for Central Counterparties (RCCP) for central
counterparties and set an expectation that systemically important payment and settlement
systems subject to the Board's authority complete and disclose publicly self-assessments against
the relevant principles and minimum standards set forth in the policy. Systemically important
systems are expected to complete and publish their initial self-assessments by December 31,
2007.
B. Objectives of the PSR Policy
The PSR policy addresses the risks that payments and securities settlement systems
present to the financial system and to the Federal Reserve Banks, including systemic risks that
may arise from the settlement process. These risks include credit, liquidity, operational, and
legal risks that arise between financial institutions, and between financial institutions and
Reserve Banks, as they settle payments and securities transactions. The PSR policy addresses
these risks in two ways. First, the policy sets out the Board’s expectations regarding the
management of risk in public- and private-sector payments and securities settlement systems,
including those operated by the Reserve Banks, that expect to settle a daily aggregate gross value

6

Federal Register, vol. 69, p. 69926, December 1, 2004.

Introduction 5
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exceeding $5 billion on any day during the next twelve months.7 Second, the policy sets out the
general methods used by the Reserve Banks to control their intraday credit exposures in Federal
Reserve accounts.
The policy requires systems within the scope of the policy to implement a riskmanagement framework appropriate for the risks a system poses to the system operator, system
participants, and other relevant parties as well as the financial system more broadly. In
particular, the policy requires that a risk-management framework (1) clearly identify risks and set
sound risk-management objectives, (2) establish sound governance arrangements, (3) establish
clear and appropriate rules and procedures, and (4) employ the resources necessary to achieve
the system’s risk-management objectives and implement effectively its rules and procedures. In
addition, the policy requires that systems deemed systemically important by the Board comply
with more-detailed risk-management standards set out in the policy. The policy also encourages
systems not within the scope of the policy to consider implementing some or all of the policy’s
elements of a sound risk-management framework.
The Board will be guided by this policy in conjunction with relevant laws and other
Federal Reserve policies, when (1) supervising state member banks, bank holding companies,
and clearinghouse arrangements, including the exercise of authority under the Bank Service
Company Act, where applicable, (2) setting the terms and conditions for the use of Federal
Reserve payment and settlement services by system operators and participants, (3) developing
and applying policies for the provision of intraday credit to Reserve Bank account holders, and
(4) interacting with other domestic and foreign financial system authorities on payments and
settlement risk-management issues. In particular, the policy states the Board’s intention to work
with other domestic and foreign financial system authorities to promote effective risk
management in payments and securities settlement systems.
The PSR policy also governs the provision of intraday or “daylight” credit in accounts at
the Reserve Banks. The Reserve Banks face credit risk should institutions be unable to fund
their daylight overdraft position in their Federal Reserve accounts before the end of the day. If
an institution were to fail after sending a funds transfer, for example, that left its account in an
overdraft position, the Federal Reserve would be obligated to cover the payment and bear any
resulting losses. The Federal Reserve’s exposure in such instances can be significant. During
2006, institutions collectively incurred peak daylight overdrafts in their Federal Reserve accounts
exceeding $140 billion per day.
The PSR policy allows Reserve Banks to control credit risk in three ways. First,
institutions that access daylight credit must satisfy safety and soundness requirements. In
general, institutions that do not meet safety and soundness requirements are not given access to
daylight credit. This reduces the likelihood of an unhealthy institution being unable to meet its
7

For purposes of the policy, a payments or securities settlement system is considered to be a multilateral
arrangement (three or more participants) among financial institutions for the purpose of clearing, netting, and/or
settling payments or securities transactions among themselves or between each of them and a central party, such as a
system operator or central counterparty. A system includes all of the governance, management, legal, and
operational arrangements used to effect settlement as well as the relevant parties to such arrangements, such as the
system operator, system participants, and system owners.

Introduction 6
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obligation to a Reserve Bank. Second, the PSR policy establishes limits on the amount of
Federal Reserve daylight credit that an institution may use. These limits are sufficiently flexible
to reflect the overall financial condition and operational capacity of each institution using
Federal Reserve payment services. Third, the policy permits Reserve Banks to protect
themselves from risk exposure of individual institutions through such measures as restricting
account activity or imposing collateral requirements. In addition, the Federal Reserve charges
fees for daylight overdrafts to provide a financial incentive for institutions to control their use of
intraday Federal Reserve credit and to recognize explicitly the risks inherent in the provision of
intraday credit.
Institutions should manage their Federal Reserve accounts effectively and use Federal
Reserve daylight credit efficiently and appropriately, in accordance with the policy. The policy
acknowledges that some intraday credit may be necessary, but the Board expects that relatively
few institutions will consistently rely on significant amounts of intraday credit supplied by the
Federal Reserve to conduct their business.

Daylight Overdraft Capacity 7
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II. Daylight Overdraft Capacity
A daylight overdraft results when an institution has insufficient funds in its Federal
Reserve account to cover its settlement obligations stemming from funds or book-entry securities
transfers or from other payment activity processed by the Federal Reserve, such as check, NSS,
or ACH transactions. The Federal Reserve measures daylight overdrafts in institutions’ Federal
Reserve accounts to determine an institution’s compliance with the PSR policy and to calculate
daylight overdraft fees.
Under the Federal Reserve’s PSR policy, each institution that maintains an account at a
Federal Reserve Bank is assigned or may establish a net debit cap, which limits the amount of
uncollateralized intraday Federal Reserve credit that the institution may use during a given
interval. The policy allows financially healthy institutions that have regular access to the
discount window to incur daylight overdrafts in their Federal Reserve accounts up to their
individual net debit caps.8 In addition, the policy allows certain institutions to pledge collateral
to the Federal Reserve to access daylight overdraft capacity above their net debit caps. In these
instances, the institution can incur daylight overdrafts up to the value of its net debit cap plus any
applicable collateralized capacity.
This section discusses the steps involved in establishing a net debit cap, the process for
applying for additional daylight overdraft capacity, the responsibilities of an institution’s board
of directors, the procedures for filing a net debit cap resolution, and the role of regulatory
agencies. Institutions considered “special situations” should consult section V of this manual for
more information on net debit caps.9
A. Net Debit Caps
An institution’s net debit cap refers to the maximum dollar amount of uncollateralized
daylight overdrafts that it may incur in its Federal Reserve account. An institution’s cap
category, or class, and its capital measure determine the dollar amount of its net debit cap.10 An
institution’s net debit cap is calculated as its cap multiple times its capital measure:
net debit cap = cap multiple x capital measure
Because an institution’s net debit cap is a function of its capital measure, the dollar amount of the
cap will vary over time as the institution’s capital measure changes. An institution’s cap
category, however, normally does not change within a one-year period.

8
Institutions that have regular access to the discount window are those institutions that are eligible to
borrow from
the discount window under normal operating conditions.
9
Institutions considered “special situations” include U.S. branches and agencies of foreign banks, nonbank
banks, industrial banks, GSEs, certain international organizations, and other institutions that lack regular access to
the discount
window.
10
Information on capital measures for different types of institutions and related regulatory reports is
provided in appendix C.

Daylight Overdraft Capacity 8
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The policy defines six cap categories: high, above average, average, de minimis, exemptfrom-filing, and zero. Each cap category is associated with a single-day and a two-week-average
cap multiple, as shown in table II-1 below. Depending on its cap category, an institution may
have two capacity levels--one that applies to its maximum allowable overdraft on any day
(“single-day cap”) and one that applies to the maximum allowable average of its peak daily
overdrafts in a two-week period (“two-week-average cap”).
Table II-1
Cap Multiple Matrix
Cap Multiples
Cap Category

Single day

Two-week average

High

2.25

1.50

Above average

1.875

1.125

Average

1.125

0.75

De minimis

0.40

0.40

Exempt-from-filing*
Zero
*

$10 million/0.20
0.0

$10 million/0.20
0.0

The net debit cap for the exempt-from-filing category is equal to the lesser of $10
million or 0.20 multiplied by a capital measure.

An institution is expected to avoid incurring daylight overdrafts whose daily maximum
level, averaged over a two-week period, would exceed its two-week-average cap or, on any day,
would exceed its single-day cap. The two-week-average cap provides flexibility in recognition
that fluctuations in payments can occur from day to day. The purpose of the single-day cap is to
limit excessive daylight overdrafts on any day and to ensure that institutions develop internal
controls that focus on the exposures each day, as well as over time. The same cap multiple
applies to both the single-day peak overdraft and the average peak overdraft for a two-week
period for institutions in the de minimis, exempt-from-filing, and zero cap categories.
B. Cap Categories
An institution can establish a positive net debit cap by submitting to its Reserve Bank at
least once a year a copy of its board of directors resolution, or it can be assigned a cap category
by its Reserve Bank. Generally, only those institutions that regularly incur daylight overdrafts of
more than $10 million or 20 percent of their capital measures on a single-day or two-weekaverage basis are required to file an annual board of directors cap resolution. Institutions that do
not file cap resolutions are assigned either an exempt-from-filing or a zero cap category. The

Daylight Overdraft Capacity 9
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Reserve Bank will notify the institution if it qualifies for an exempt-from-filing cap. If an
institution has any questions regarding its cap, the institution should contact its Reserve Bank.
Self-assessed
To establish a net debit cap in the high, above average, or average category, an institution
must perform a self-assessment of its creditworthiness, intraday funds management and controls,
customer credit policies and controls, and operating controls and contingency procedures. The
results of the self-assessment should indicate the appropriate cap category for the institution.
The institution’s (or its holding company’s) board of directors should review and approve
that institution’s self-assessment and recommended cap category. The directors’ approval must
be communicated to the Reserve Bank by submission of a board of directors resolution
(appendix B provides a sample resolution). The Reserve Bank will review the cap resolution for
appropriateness, in conjunction with the institution’s primary regulator. Should the Reserve
Bank determine that the cap resolution is not appropriate, it will advise the institution to
reevaluate the self-assessment and submit another resolution. The self-assessment process and
the board of directors review should be conducted at least once in each twelve-month period.
An institution that experiences a significant change in its financial condition or
organizational structure, such as a merger, acquisition, large charge-off, or increase in loan loss
reserves, is required to review its current cap category with particular focus on creditworthiness
standards. A resolution to establish a different cap category may be submitted by the institution,
or may be required by the Reserve Bank, before the annual renewal date if circumstances warrant
such a change.
Details of the self-assessment process are provided in section VI and appendix A of this
manual. Other institutions, such as those in the zero, exempt-from-filing, or the de minimis cap
categories, may also find it helpful to review certain sections of the self-assessment procedures,
which contain information on evaluating the effectiveness of controls over payments processing.
De minimis
Institutions that incur daylight overdrafts up to 40 percent of their capital measure may
qualify for a de minimis net debit cap. To ease the burden of performing a self-assessment for
these institutions, the PSR policy allows a financially healthy institution to incur daylight
overdrafts of up to 40 percent of its capital measure if the institution submits a board of directors
resolution. An institution with a de minimis cap must submit to its Reserve Bank at least once in
each twelve-month period a copy of its board of directors resolution (or a resolution by its
holding company’s board) approving the institution’s use of daylight credit up to the de minimis
level. If an institution with a de minimis cap exceeds its cap during a two-week reservemaintenance period, its Reserve Bank will counsel the institution and decide whether the de
minimis cap should be maintained or the institution will be required to perform a self-assessment
for a higher cap.

Daylight Overdraft Capacity 10
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Exempt-from-filing
The exempt-from-filing category permits an institution to incur daylight overdrafts up to
the lesser of $10 million or 20 percent of its capital measure. If a Reserve Bank determines that
an institution is eligible for exempt status, it will assign this category without requiring any
additional documentation. As a result, the exempt-from-filing cap category substantially reduces
the administrative burden associated with obtaining a net debit cap. The majority of institutions
that maintain Federal Reserve accounts are in the exempt-from-filing category.
To be eligible for the exempt-from-filing cap category, an institution must be in healthy
financial condition and should use only minimal amounts of Federal Reserve daylight credit.
Specifically, an institution’s daylight overdraft history should show only rare overdrafts of more
than $10 million or 20 percent of its capital measure, whichever amount is smaller. Any
overdrafts above this limit should occur no more than twice in a four-week period (two
consecutive two-week reserve maintenance periods). An institution may contact its Reserve
Bank for verification that it has been granted or is eligible for the exempt status.
An institution with a new Federal Reserve account may be eligible for exempt status if it
is considered to be in healthy financial condition. Furthermore, if an institution with an exemptfrom-filing cap category later determines that it requires more daylight overdraft capacity, it may
file a cap resolution for a higher net debit cap. Institutions in the exempt-from-filing cap
category are not required to renew their caps annually. Reserve Banks will monitor the financial
condition of institutions to ensure they continue to qualify for the exempt-from-filing net debit
cap.
Zero
An institution with a net debit cap of zero may not incur daylight overdrafts in its Federal
Reserve account. Some institutions have established management policies that prohibit daylight
overdrafts. Such institutions may adopt a voluntary zero cap but are not required to do so by
Federal Reserve policy. An institution may adopt a zero cap by sending a letter to its Reserve
Bank. The zero cap will remain in effect until the institution files a cap resolution for a different
cap category or until the institution requests an exempt-from-filing cap.
In other cases, a Reserve Bank may assign an institution a zero cap. Institutions that may
pose special risks to the Federal Reserve, such as those without regular access to the discount
window, those incurring daylight overdrafts in violation of the Federal Reserve’s PSR policy, or
those in weak financial condition, are generally assigned a zero cap. Recently chartered
institutions may also be assigned a zero cap. An institution that has been assigned a zero cap as a
result of recurring daylight overdrafts in excess of its cap may be assigned a higher cap if the
institution is considered to be in healthy financial condition. An institution seeking to be
assigned to a cap category that requires the approval of its board of directors (de minimis or selfassessed) should confirm its eligibility with the Reserve Bank before proceeding to obtain
approval from its board of directors.

Daylight Overdraft Capacity 11
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C. Collateralized Daylight Overdraft Capacity
The PSR policy recognizes that while net debit caps provide sufficient liquidity to most
institutions, some institutions may still experience liquidity pressures. To relieve these pressures,
certain institutions with self-assessed net debit caps may pledge collateral to the Federal Reserve
to secure daylight overdraft capacity in excess of their net debit caps, subject to Reserve Bank
approval. The net debit cap plus the additional capacity is referred to as the “maximum daylight
overdraft capacity.” This policy is intended to provide some additional liquidity through the
pledge of collateral to the few institutions that might otherwise be constrained from participating
in risk-reducing payment system initiatives, while allowing the Federal Reserve to protect the
public sector from additional credit risk.
Institutions considering requesting maximum daylight overdraft capacity must have
already explored other alternatives to address their increased liquidity needs.11 An institution
with a self-assessed net debit cap that wishes to expand its daylight overdraft capacity by
pledging collateral should consult with its ARB.12 Institutions are expected to submit the
following information when requesting maximum daylight overdraft capacity:
•

The amount of daylight overdraft capacity requested

•

Written justification for requesting additional daylight overdraft capacity

•

A principal contact at the institution.

11
Institutions may consider applying for maximum daylight overdraft capacity for daylight overdrafts
resulting from Fedwire funds transfers, Fedwire book-entry securities transfers, National Settlement Service entries,
and ACH credit originations after exploring potential alternatives available to address their increased intraday credit
needs, such as (1) filing for a higher net debit cap, (2) shifting funding patterns or delaying the origination of funds
transfers in a way that does not significantly increase operational risks, or (3) transferring some payments processing
business to a correspondent bank. Institutions incurring daylight overdrafts as a result of other payment activity may
be eligible
for administrative counseling flexibility (59 Federal Register 54915-18, November 2, 1994).
12
Institutions with an exempt-from-filing or a de minimis net debit cap are not eligible to apply for
maximum daylight overdraft capacity. Institutions that have been assigned a zero net debit cap by a Reserve Bank
also are not eligible to apply for maximum daylight overdraft capacity. If an institution that qualifies for a positive
cap has adopted a zero cap voluntarily, it must apply for a higher net debit cap before requesting maximum daylight
overdraft capacity.

Daylight Overdraft Capacity 12
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In reviewing an institution’s request for maximum daylight overdraft capacity, the
Reserve Bank will consider the institution’s reasons for applying for additional capacity, the
institution’s financial condition, and other information, as applicable. To be approved for
maximum daylight overdraft capacity, the institution must file a board of directors resolution
with the Reserve Bank for such capacity. (Appendix B provides a sample resolution.)13
The Reserve Bank’s approval of an institution’s request for additional daylight overdraft
capacity is an approval for a maximum level of daylight overdraft capacity. The maximum
daylight overdraft capacity is defined as follows:

maximum daylight overdraft capacity =
single-day net debit cap + collateralized capacity.14
Like the net debit cap, the maximum daylight overdraft capacity is subject to a single-day
and a two-week average limit. The institution’s single-day daylight overdraft limit is equal to its
single-day net debit cap plus its collateralized capacity. The institution’s two-week limit is equal
to its two-week-average net debit cap plus its collateralized capacity averaged over a two-week
reserve-maintenance period. The institution is expected to avoid incurring daylight overdrafts
that would exceed these limits.
Institutions have some flexibility as to the specific types of collateral they may pledge to
the Reserve Banks; however, all collateral must be acceptable to the Reserve Banks.15 A selfassessed institution that has been approved for maximum daylight overdraft capacity may, at any
time, pledge more or less collateral than the collateralized capacity. Pledging less collateral
reduces the effective maximum daylight overdraft capacity level; however, pledging more
collateral will not increase the maximum daylight overdraft capacity above the approved level.
13

A foreign banking organization (FBO) should undergo the same process as a domestic bank in applying
for maximum daylight overdraft capacity for its U.S. branches and agencies. Many FBOs, however, do not have the
same management structure as U.S. depository institutions, and adjustments should be made as appropriate. If an
FBO’s board of directors has a more limited role to play in the bank’s management than a U.S. board has, the
maximum daylight overdraft capacity request should be reviewed by senior management at the FBO’s head office
that exercises authority over the FBO equivalent to the authority exercised by a board of directors over a U.S.
depository institution. In cases in which the board of directors exercises authority equivalent to that of a U.S. board,
the request for maximum daylight overdraft capacity should be reviewed by the board of directors. A depository
institution may revise its request for additional collateralized daylight overdraft capacity at any time, provided there
is sufficient
justification for doing so.
14
Collateralized capacity represents the collateralized component of the maximum daylight overdraft
capacity approved by the Reserve Bank. The amount of collateralized capacity cannot exceed the difference
between the institution’s maximum daylight overdraft capacity level and its single-day net debit cap. For example,
if the single-day net debit cap increases as a result of an increase in capital at the institution, its maximum daylight
overdraft capacity is unchanged, so its collateralized capacity is reduced. The institution’s overdraft position will be
measured against the lesser of (1) its maximum daylight overdraft capacity or (2) its net debit cap plus the amount of
collateral15pledged.
See the Federal Reserve’s discount window website at
http://www.frbdiscountwindow.org/discountmargins.html for types of acceptable collateral. Depository institutions
seeking to support a maximum daylight overdraft capacity limit with securities in transit must receive Reserve Bank
approval. Securities in transit refer to book-entry securities transferred over the Fedwire Securities Service that have
been purchased by a depository institution, but not yet paid for and owned by the institution’s customers.

Daylight Overdraft Capacity 13
_________________________________________________________________________
D. Role of an Institution’s Board of Directors
The Federal Reserve expects the board of directors of an institution to establish and
implement policies to ensure that its management follows safe and sound operating practices,
complies with applicable banking laws, and prudently manages financial risks. Given these
responsibilities, the directors play a vital role in the Federal Reserve’s efforts to reduce risks
within the payment system.
As part of the PSR policy, the Federal Reserve requests that an institution’s board of
directors, at a minimum, accept the following responsibilities:
•

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

•

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

•

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

The directors may appoint a committee of directors to focus on the institution’s
participation in payment systems and its use of daylight credit. Furthermore, a higher-level
board of directors of the same corporate family may conduct a self-assessment review and
approve a resolution. For example, the board of directors of the parent company of a bank
holding company may review the self-assessment and request a net debit cap for one or more of
its banking subsidiaries. The board of directors should be aware that delegating the review
process to a committee or higher level board does not absolve the directors from the
responsibilities outlined in the Federal Reserve’s PSR policy. The directors may not delegate this
responsibility to an outside consultant or third-party service provider.
For institutions requesting daylight overdraft capacity above their net debit caps, the
board of directors must understand the reasons the institution is requesting additional daylight
overdraft capacity, the amount of the collateralized capacity, and the total amount of the net debit
cap plus collateralized credit.
The Federal Reserve recognizes that the boards of directors of U.S. branches and
agencies of foreign banks do not necessarily serve in the same capacity as boards of directors of
institutions in the United States. Therefore, individuals who are responsible for formulating

Daylight Overdraft Capacity 14
_________________________________________________________________________
policy at the foreign bank’s head office may substitute for the board of directors in performing
the responsibilities specified in the PSR policy.
E. Cap Resolutions
The policy requires a board of directors resolution to establish a cap in the de minimis or
self-assessed (average, above average, or high) cap categories or to establish maximum daylight
overdraft capacity. These resolutions must follow a prescribed format. Specifically, resolutions
must include the following: (1) the official name of the institution, (2) the city and state in which
the institution is located, (3) the date the board acted, (4) the cap category adopted, (5) the
appropriate official signature, and (6) the ABA routing number of the institution. For a board
resolution approving the results of a self-assessment, the resolution must identify the ratings
assigned to each of the four components of the self-assessment as well as the overall rating used
to determine the actual net debit cap. In addition, the institution should indicate if it did not use
the Creditworthiness Matrix approach in determining its creditworthiness rating (appendix B
provides sample resolutions).
An institution’s primary supervisor may review the resolutions, and any information or
materials used by the institution’s directors in fulfilling their responsibilities under the PSR
policy must be made available to the institution’s supervisory examiners. Supporting
documentation used in determining an appropriate cap category must be maintained at the
institution. At a minimum, the institution’s “cap resolution file” must contain:
•

An executed copy of the resolution adopting the net debit cap or maximum
daylight overdraft capacity

•

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

•

Minutes and other documentation that serve as a formal record of any
discussions regarding the self-assessment or the request for maximum
daylight overdraft capacity by the directors

•

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

•

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

Daylight Overdraft Capacity 15
_________________________________________________________________________
•

For the maximum daylight overdraft capacity resolution, the maximum
daylight overdraft capacity amount.

The board of directors resolutions for de minimis and self-assessed institutions and for
maximum daylight overdraft capacity are valid for one year after the Reserve Bank approves the
net debit cap or the maximum daylight overdraft capacity amount. An institution with a de
minimis cap must renew its cap resolution annually by submitting a new resolution to its Reserve
Bank. An institution with a self-assessed cap must perform a self-assessment annually and
submit an updated cap resolution to its Reserve Bank. An institution with a maximum daylight
overdraft capacity amount must perform a self-assessment annually and submit an updated
maximum daylight overdraft capacity board of directors resolution to its Reserve Bank annually.
In conjunction with an institution’s primary supervisor, the Reserve Bank reviews each
resolution for appropriateness.
Because institutions may, in some cases, require considerable time to complete and
approve their self-assessments, institutions should be aware of the expiration date of their cap
resolutions well in advance. If a new cap resolution is not received by the expiration date, an
institution may be assigned a zero cap, which prohibits the institution from using any Federal
Reserve daylight credit.
F. Confidentiality of Cap Information
The Federal Reserve considers cap categories and net debit caps to be confidential information
and will share this information only with an institution’s primary supervisor. Institutions are also
expected to treat their cap information as confidential. Cap information should not be shared
with outside parties or mentioned in any public documents.16

16

See SR Letter 85-35 Confidentiality of Sender Net Debit Caps and Self-Assessment Ratings.

Daylight Overdraft Monitoring and Management 16
_________________________________________________________________________
III. Daylight Overdraft Monitoring and Management
The information provided in this section is intended to assist institutions in monitoring
their Federal Reserve account balances in order to control daylight overdrafts. All institutions
that maintain Federal Reserve accounts and use Federal Reserve services are expected to monitor
their account balances on an intraday basis. Institutions should be aware of payments they are
making from their accounts each day and how those payments are funded. Institutions are
expected to use their own systems and procedures, as well as the Federal Reserve’s systems,
described below, to monitor their Federal Reserve account balance and payment activity.
A. Daylight Overdraft Measurement
To monitor an institution’s overdraft activity and its compliance with the PSR policy and
to calculate daylight overdraft charges, the Federal Reserve uses the Daylight Overdraft
Reporting and Pricing System (DORPS). In addition, DORPS maintains information on
institutions’ current reported capital to calculate their net debit caps.
At the end of each Fedwire operating day, DORPS extracts transaction-level information
from Reserve Banks’ accounting and payment systems and calculates end-of-minute account
balances according to a set of daylight overdraft posting rules.17 An institution’s account balance
is measured by DORPS at the end of each minute based on the institution’s opening balance and
all payment transactions posted to the institution’s account up until that moment. Although
DORPS records positive and negative total end-of-minute balances in each institution’s account,
positive end-of-minute balances do not offset negative balances at other times during the day for
purposes of determining compliance with net debit caps or for calculating daylight overdraft
fees. In addition, when more than one account is maintained for an institution by Reserve Banks,
the multiple accounts are consolidated for purposes of calculating the end-of-minute balance.
The daylight overdraft measurement period begins with the standard opening time of
Fedwire at 9:00 p.m. ET the preceding calendar day and continues until the standard closing time
of Fedwire at 6:30 p.m. ET. In cases of extensions of Fedwire hours, the final closing account
balance is recorded as if it were the balance at the standard closing time.
DORPS generates reports at the end of each two-week reserve maintenance period.
These reports provide useful information for monitoring daylight overdrafts, such as peak daily
overdrafts for the period, overdrafts in excess of the institution’s net debit cap, and end-ofminute account balances for a particular day. Reserve Banks may make these reports available
to institutions to assist in their internal account monitoring and control. These reports may also
be provided by Reserve Banks in the process of counseling institutions that have incurred
daylight overdrafts in excess of their daylight overdraft capacity. These reports are available in
electronic or paper form. Institutions that do not incur daylight overdrafts for a particular period
17

The schedule of posting rules is located in part II of the PSR policy, available at
www.federalreserve.gov/paymentsystems/psr/policy.pdf

Daylight Overdraft Monitoring and Management 17
_________________________________________________________________________
generally will not receive daylight overdraft reports. For more information on daylight overdraft
reports, see the Federal Reserve’s Account Management Guide, available at
http://www.frbservices.org/Accounting/pdf/amg.pdf.
B. Monitoring Compliance with the PSR Policy
Reserve Banks generally monitor institutions’ compliance with the PSR policy over each
two-week reserve maintenance period. At the end of each two-week reserve maintenance period,
DORPS generates several reports that provide both Reserve Banks and institutions with
information for monitoring daylight overdrafts, including the largest (or peak) daylight overdraft
for each day during the period and daylight overdrafts in excess of an institution’s approved
daylight overdraft capacity.18 An institution incurs a cap breach when its account balance for a
particular day shows one or more negative end-of-minute balances in excess of its single-day cap
or when its average peak daylight overdraft over a reserve maintenance period exceeds its twoweek-average cap.19, 20
The Federal Reserve considers all cap breaches to be violations of the PSR policy except
in the following circumstances. First, the policy allows institutions in the exempt-from-filing
cap category to incur up to two cap breaches in two consecutive two-week reserve maintenance
periods. Second, certain cap breaches incurred by institutions in the administrative counseling
flexibility program are not considered policy violations.21 In addition, a Reserve Bank has
discretion to waive a violation if it determines that the cap breach resulted from circumstances
beyond the institution’s control, such as an operational failure at a Reserve Bank.
For daylight overdraft purposes, accounts of U.S. branches and agencies of foreign banks
and merger-transitions accounts are monitored on a consolidated basis; that is, a single account
balance is derived by adding together the end-of-minute balances of each account. The accounts
of affiliated institutions are monitored separately if they are separate legal entities. In addition,
for institutions with accounts in more than one Federal Reserve District, the ARB coordinates the
Federal Reserve’s daylight overdraft monitoring activities for the consolidated accounts.

18
Institutions may also access current information on their account balance and daylight overdraft position
using the Account Management Information system (AMI) on FedLine Web. Section C below, Real-Time
Monitoring,
contains additional information on AMI.
19
An institution’s two-week-average peak daylight overdraft is calculated by adding the largest overdraft
incurred for each day during a reserve maintenance period and dividing that sum by the number of business days in
the period.
20
For a self-assessed institution that has been approved for maximum daylight overdraft capacity, the twoweek-average limit is equal to the two-week-average cap plus the amount of collateral pledged to secure the
collateralized capacity, averaged over a two-week reserve-maintenance period. The single-day limit is equal to an
institution’s
net debit cap plus the amount of applicable collateralized capacity.
21
In October 1994, the Board approved a program of administrative counseling flexibility to help relatively
small institutions that, by the nature of their business, will continue to exceed a net debit cap even after the
appropriate adjustments have been made. Under the counseling flexibility program, the Reserve Banks will work
with the affected depository institutions to identify alternatives that would avoid or reduce daylight overdrafts
caused by transactions other than Fedwire funds transfers, National Settlement Service transactions, or ACH credit
originations. The Reserve Banks generally will not subject these institutions to escalated levels of counseling,
require collateral, or assign a zero cap. Institutions in the exempt-from-filing net debit cap category are not eligible
for the administrative counseling flexibility program.

Daylight Overdraft Monitoring and Management 18
_________________________________________________________________________
For example, consider a foreign bank family with branches or agencies in New York,
Chicago, and San Francisco. Assume that the Federal Reserve Bank of New York is the ARB for
the foreign bank and that the family’s intraday position at selected intervals is as follows (in
$millions):
Time

New York

Chicago

San Francisco

Consolidated

10 a.m.

($10)

$5

$15

$10

12 p.m.

($20)

$5

$15

$0

2 p.m.

($30)

$10

$15

($5)

On a consolidated basis, overdrafts at the New York branch are offset by positive
balances in the Chicago and San Francisco branches except at 2 p.m. As the ARB, the Federal
Reserve Bank of New York would compare the bank’s consolidated position with its single-day
net debit cap and would notify the New York office of the foreign bank if the overdraft exceeded
the cap.
Consequences of policy violations
A policy violation may initiate a series of Reserve Bank actions aimed at deterring an
institution’s excessive use of Federal Reserve intraday credit. These actions depend on the
institution’s history of daylight overdrafts and financial condition. Initial actions taken by the
Reserve Bank may include an assessment of the causes of the overdrafts, a counseling letter to
the institution, and a review of the institution’s account-management practices. In addition, the
Reserve Bank may require an institution to submit documentation specifying actions it will take
to address the overdraft problems. If policy violations continue to occur, the Reserve Bank may
take additional actions. For example, if a financially healthy institution in the zero, exemptfrom-filing, or de minimis cap category continues to breach its cap, the Reserve Bank may
strongly recommend that the institution file a cap resolution or perform a self-assessment to
obtain a higher net debit cap.
In situations in which an institution continues to violate the PSR policy, and counseling
and other Reserve Bank actions have been ineffective, the Reserve Bank may assign the
institution a zero cap. In addition, the Reserve Bank may impose other account controls that it
deems prudent, such as requiring the institution to pledge collateral, imposing clearing balance
requirements; rejecting Fedwire funds transfers, ACH credit originations, or NSS transactions
that would cause or increase an institution’s daylight overdraft; or requiring the institution to
prefund certain transactions. Reserve Banks also keep institutions’ primary regulators apprised
of any recurring overdraft problems.
C. Real-time Monitoring and the Account Balance Monitoring System
The Reserve Banks use the Account Balance Monitoring System (ABMS) to monitor in

Daylight Overdraft Monitoring and Management 19
_________________________________________________________________________
real time the payment activity of institutions that may expose the Federal Reserve and other
payment system participants to risk of loss. ABMS serves as both an information source and an
account monitoring and control tool. It allows institutions to obtain intraday balance information
for purposes of managing their use of daylight credit and avoiding overnight overdrafts. All
institutions that have an electronic connection to the Federal Reserve’s Fedwire funds transfer
service are able to access their intraday Federal Reserve account position in ABMS or in
Account Management Information (AMI).22 While ABMS is not a substitute for an institution’s
own internal tracking and monitoring systems, it does provide real-time account information
based on Fedwire funds and securities transfers and NSS transactions. Additionally, ABMS
captures debits and credits resulting from other payment activity as those transactions are
processed in the Reserve Bank’s accounting system.23 ABMS also provides authorized Federal
Reserve Bank personnel with a mechanism to monitor and control account activity for selected
institutions.
ABMS has the capability to reject or intercept certain transactions affecting an
institution’s account. This capability is called “real-time monitoring.” The Reserve Banks use
real-time monitoring to prevent selected institutions from effecting certain transactions if their
accounts lack sufficient funds to cover the payments. Institutions are generally notified before a
Reserve Bank begins monitoring their accounts in real time.
If an institution’s account is monitored in the “reject” mode in ABMS, any outgoing
Fedwire funds transfer, NSS transaction, or ACH credit origination that exceeds its available
funds is rejected back to the sending institution. The institution can initiate the transaction again
when sufficient funds became available in its account.24 If an institution’s account is monitored
in the “intercept” mode, sometimes referred to as the “pend” mode, outgoing funds transfers that
would cause an overdraft in excess of the threshold will not be processed but will be held for
review by the Reserve Bank. These intercepted transactions will be rejected or released by the
Reserve Bank once funds are available in the institution’s account. Reserve Banks will normally
be in direct contact with an institution if any of its funds transfers are intercepted.
ABMS calculates balances three ways so that institutions and Reserve Bank staff can
take into account the effect of the daylight overdraft posting rules on an institution’s payment
activity. The daylight overdraft (DLOD) balance in ABMS reflects the balance in the account
according to the transaction posting rules described in the PSR policy and is usually equivalent
to the balance measured by DORPS.25 In a few instances; however, the DLOD balance in
ABMS may be slightly different from the account balance recorded in DORPS because DORPS
22

AMI is a web-based application that provides institutions with real-time access to their intraday account
balances, detailed transaction information, a variety of reports, and inquiry capabilities. Institutions can obtain
information on ABMS, DORPS, and AMI in the Account Management Guide at
www.frbservices.org/Accounting/pdf/amg.pdf.
23
ABMS receives transaction information from the Fedwire Funds Service, the Fedwire Securities Service,
and the National Settlement Service in real time; information on cash, check, and Treasury Investment Program
transactions
at 5-minute intervals; and information on prefunded ACH credit originations every 15 minutes.
24
The institution will be required to prefund its ACH credit originations, as the total amount of all ACH
credit item originations will be deducted from its account when the Reserve Bank processes the items.
25
The schedule of posting rules is located in part II of the PSR policy, available at
www.federalreserve.gov/paymentsystems/psr/policy.pdf

Daylight Overdraft Monitoring and Management 20
_________________________________________________________________________
takes an end-of-minute “snapshot,” while ABMS continuously updates balances as transactions
are processed. In addition, the DLOD balance in ABMS may be different from the account
balance in DORPS if transactions are processed late.
A second balance calculated by ABMS, the account (ACCT) balance, reflects the sum of
all transactions posted to ABMS regardless of the daylight overdraft posting rules.
A third balance, the available funds (AVL FNDS) balance, shows funds available to an
institution that include its daylight overdraft capacity. The AVL FNDS balance is calculated by
using either the DLOD balance or the ACCT balance and then adding the totals for the
institution’s single-day net debit cap, any applicable collateralized capacity, and any other
amounts memo posted to the institution’s account.26 Reserve Banks may choose to monitor
institutions based on either the ACCT balance or DLOD balance, depending on the
circumstances.

26
Reserve Banks use the memo post function of ABMS to post transactions to ABMS that may not be
passed to the Federal Reserve Bank’s accounting system until later in the day (for example, cash shipments).

Daylight Overdraft Fees 21
_________________________________________________________________________
IV. Daylight Overdraft Fees
In 1992, the Board approved the assessment of daylight overdraft fees beginning in April
1994. The Federal Reserve charges institutions fees for daylight overdrafts incurred in their
Federal Reserve accounts. This section describes the fee calculation and assessment.
A. Calculation of Daylight Overdraft Charges
For each two-week reserve-maintenance period, the Reserve Banks calculate and assess
daylight overdraft fees, which are equal to the sum of any daily daylight overdraft charges during
the reserve-maintenance period. For each day, an institution’s daylight overdraft charge is the
effective daily rate charged for daylight overdrafts multiplied by the average daylight overdraft
for the day minus a deductible valued at an effective daily rate.
Daylight overdraft fees are calculated using an annual rate of 36 basis points, quoted on
the basis of a 24-hour day. The annual rate is converted to an effective annual rate by
multiplying it by the fraction of the day that Fedwire is scheduled to be open, currently 21.5
hours out of 24, or 21.5/24. Thus, the current effective annual rate charged for overdrafts is
32.25 basis points (36 basis points x 21.5/24 hours). The effective annual rate is converted to an
effective daily rate by multiplying it by 1/360.27
The average overdraft for each day is calculated by adding together any negative end-ofminute balances incurred during the standard operating day of the Fedwire funds transfer system
and dividing this amount by the number of minutes in the standard Fedwire operating day.28 All
end-of-minute overdrafts incurred during the Fedwire day, including those not exceeding an
institution’s net debit cap, are included in this calculation. Positive account balances on a given
day are effectively set to zero and do not offset any overdrafts incurred that day in computing the
average daylight overdraft amount. The occasional extensions of Fedwire beyond the standard
21.5-hour day do not affect the number of minutes used in computing the average overdraft.
The gross overdraft charge for each day is reduced based on an institution’s deductible.
The deductible represents a threshold level of average overdrafts that an institution may incur
without being charged a fee. This deductible is intended to provide liquidity to the payment
system and to compensate for overdrafts caused by minor computer outages at Reserve Banks.
As a result of the deductible, many institutions with daylight overdrafts in a particular two-week
period do not incur fees.
The deductible equals 10 percent of an institution’s capital measure for daylight overdraft
purposes; valued at the effective daily rate for a 10-hour operating day. The calculation is
similar to the description above with one exception: the portion of the day for which the daily
rate is applied to the deductible is fixed at ten out of twenty-four hours. Because the effective
27
Under the current 21.5-hour Fedwire operating day, the effective daily daylight-overdraft rate is
truncated to 0.0000089.
28
The standard operating day for the Fedwire funds transfer system currently extends from 9:00:00 p.m.
eastern time the preceding calendar day to 6:30:59 p.m. eastern time, a total of 1291 minutes.

Daylight Overdraft Fees 22
_________________________________________________________________________
daily rate applicable to the deductible is constant at the ten-hour-operating-day rate, changes to
the standard Fedwire operating day should not significantly affect the value of the deductible.
For each reserve maintenance period, the daylight overdraft charge is equal to the sum of
the charges for each day of the period. The gross overdraft charge for a particular day is equal to
the effective daily rate charged for overdrafts (the effective rate times 1/360) multiplied by the
average overdraft for the day. The charge for each day is equal to the gross overdraft charge less
the deductible, valued at the effective daily rate. The example shown in figure IV-1 below uses
the following equations to calculate the daylight overdraft charge.
gross overdraft charge = effective daily rate x average overdraft
daily charge = gross overdraft charge – value of the deductible
Figure IV-I
Example of Daylight Overdraft Charge Calculation
Policy parameters:
Official Fedwire day = 21.5 hours
Deductible percentage of capital = 10%
Rate charged for overdrafts = 36 basis points (annual rate)
Institution’s parameters:
Risk-based capital = $50 million
Sum of end-of-minute overdrafts for one day = $4 billion
Daily Charge calculation:
Effective daily rate = .0036 x (21.5/24) x (1/360) = .0000089
Average overdraft = $4,000,000,000 / 1291 minutes = $3,098,373
Gross overdraft charge = $3,098,373 x .0000089 = $27.58
Effective daily rate for deductible = .0036 x (10/24) x (1/360) = .0000042
Value of the deductible = .10 x $50,000,000 x .0000042 = $21.00
Overdraft charge = 27.58 - 21.00 = $6.58

Identical daily overdraft activity for each day of the reserve maintenance period (generally ten
business days) would result in a two-week overdraft charge of $65.80.

Institutions that lack regular access to the discount window are not eligible for daylight
overdrafts and are charged a penalty fee for any daylight overdrafts they incur. See section V,
Special Situations, for a complete description of the fees applicable to these institutions.

Daylight Overdraft Fees 23
_________________________________________________________________________
B. Billing and Adjustments
Assessment of charges
At the end of each two-week reserve maintenance period, the Reserve Bank provides a
report of preliminary daylight overdraft charges to each institution that incurred charges in that
period.29 Final charges are calculated and an assessment to the institution’s Federal Reserve
account will be made at the end of the reserve maintenance period following the reserve
maintenance period in which charges were assessed. Two-week reserve maintenance period
charges of $25 or less for most institutions will be waived.30 Institutions may not use earnings
credits to offset overdraft charges.
Adjustments to calculated daylight overdraft charges may be appropriate in limited
circumstances, such as in cases of extended computer or communications operational difficulties
at a Reserve Bank or of errors or incorrect accounting entries. However, Reserve Banks will not
make adjustments to compensate for institutions’ computer problems.

29
Institutions that incur overdrafts that are sufficiently large to result in daylight overdraft fees will receive
a preliminary Advice of Daylight Overdraft Charges Report at the close of the reserve maintenance period in which
the overdrafts occurred. The report shows the average overdraft for each day on which the fees occurred. An
example of the report can be viewed in the Account Management Guide at
www.frbservices.org/Accounting/pdf/amg.pdf.
30
Daylight overdraft fees of $25 or less are not waived for Edge and agreement corporations, bankers’
banks that have not waived their exemption from reserve requirements, limited-purpose trust companies, and GSEs
and international organizations. These types of institutions do not have regular access to the discount window and,
therefore, are expected not to incur daylight overdrafts in their Federal Reserve accounts. The Federal Reserve
charges a daylight overdraft penalty fee against the average daily daylight overdraft incurred by such institutions.

Special Situations 24
_________________________________________________________________________
V. Special Situations
A. U.S. Branches and Agencies of Foreign Banks31
In general, U.S. branches and agencies of foreign banks are treated in the same manner as
domestic institutions under the Federal Reserve’s PSR policy. However, there are several unique
considerations affecting the way in which the policy is applied to U.S. branches and agencies of
foreign banks, as discussed below and in the self-assessment procedures in section VI of the
guide.
Net debit caps for foreign banks are calculated generally in the same manner as they are
calculated for domestic institutions. Net debits caps are calculated by multiplying an institution’s
cap multiple by an institution’s capital measure. However, the determination of the capital
measure, known as the U.S. capital equivalency, is substantially different for foreign banks and
depends on the foreign banking organization’s (FBO’s) strength of support assessment (SOSA)
ranking and on whether the bank is a financial holding company (FHC).32, 33
U.S. capital equivalency
For U.S. branches and agencies of foreign banks, net debit caps on daylight overdrafts in
Federal Reserve accounts are calculated by applying the cap multiples for each cap category to
the FBO’s U.S. capital equivalency measure. The U.S. capital equivalency equals
•
•
•
•

35 percent of capital for FBOs that are financial holding companies (FHCs), or
25 percent of capital for FBOs that are not FHCs and are ranked a SOSA 1, or
10 percent of capital for FBOs that are not FHCs and are ranked a SOSA 2, or
5 percent of “net due to related depository institutions” for FBOs that are not
FHCs and are ranked a SOSA 3.34

U.S. branches and agencies of foreign banks that wish to establish a nonzero net debit cap
category and are an FHC or are ranked SOSA 1 or 2 are required to file the Annual Daylight

31
A U.S. branch or agency is a branch or agency of a foreign banking organization (FBO) located in the
United States.
32
The SOSA ranking is composed of four factors, including the FBO’s financial condition and prospects,
the system of supervision in the FBO’s home country, the record of the home country’s government in support of
the banking system or other sources of support for the FBO; and transfer risk concerns. Transfer risk relates to the
FBO’s ability to access and transmit U.S. dollars, which is an essential factor in determining whether an FBO can
support its U.S. operations. The SOSA ranking is based on a scale of 1 through 3, with 1 representing the lowest
level of supervisory concern.
33
The Gramm-Leach-Bliley Act (Public Law 106-102, 113 Stat. 1338 (1999)) defines a financial holding
company as a bank holding company that meets certain eligibility requirements. In order for a bank holding
company to become a financial holding company and be eligible to engage in the new activities authorized under the
Gramm-Leach-Bliley Act, all depository institutions controlled by the bank holding company must be well
capitalized and well managed. With regard to a foreign bank that operates a branch or agency or owns or controls a
commercial lending company in the United States, the act requires the Board to apply comparable capital and
management standards that give due regard to the principle of national treatment and equality of competitive
opportunity.
34
This item is reported on the foreign bank family's quarterly Report of Assets and Liabilities of U.S.
Branches and Agencies of Foreign Banks (Federal Financial Institution Examination Council report FFIEC 002).

Special Situations 25
_________________________________________________________________________
Overdraft Capital Report for U.S. Branches and Agencies of Foreign Banks (FR 2225).35 A net
debit cap, or any extension of intraday credit, is granted to an institution at the discretion of the
Reserve Bank. In limited circumstances, a Reserve Bank may grant a net debit cap or extend
intraday credit to a financially healthy SOSA 3-ranked FBO; the Reserve Bank may require such
credit to be fully collateralized, given the heightened supervisory concerns with SOSA 3-ranked
FBOs. An institution should contact its Reserve Bank for guidance in these situations.
As in the case of U.S. institutions, the ARB must have the ability to assess regularly the
financial condition of a foreign bank to grant the institution a daylight overdraft cap other than
zero. The ARB may require information regarding Tier I and total risk-based capital ratios for
the consolidated foreign bank.36 The ARB may require U.S. branches and agencies of foreign
banks seeking a positive daylight overdraft cap (exempt, de minimis, or self-assessed cap
categories) to provide capital ratios at the time the cap is established and annually thereafter.
Workpapers for capital ratios should be maintained at a designated U.S. branch or agency and are
subject to review by the institution’s primary supervisor. The Federal Reserve considers capital
information provided to the ARB in connection with an institution’s daylight overdraft cap to be
confidential.
Allocation of caps
The Federal Reserve monitors the daylight overdrafts of U.S. branches and agencies of
foreign banks on a consolidated basis. Each foreign bank family, consisting of all of the U.S.
branches and agencies of a particular foreign bank, has a single daylight overdraft cap. Like
other institutions with accounts in more than one Federal Reserve District, intraday account
balances of all the U.S. branches and agencies in a foreign bank family are added together for
purposes of monitoring against the daylight overdraft cap, as described in section III.
For real-time monitoring purposes, however, a foreign bank that has offices in more than
one District may choose to allocate a portion of its net debit cap to branches or agencies in
Districts other than that of the ARB. Unless a foreign bank family instructs otherwise, the
Federal Reserve will assign the dollar value of the family’s single-day daylight overdraft cap to
the branch or agency located in the Federal Reserve District of the ARB. Using a format similar
to the sample letter in appendix B, the foreign bank family may indicate to the ARB the dollar
amount to be allocated to offices in other Districts. The foreign bank family should update or
confirm the allocation annually with its ARB. Any amount that is not allocated to offices in
other Districts will be assigned to the branch or agency in the District of the ARB.
If a foreign bank has an approved amount of maximum daylight overdraft capacity, only
the uncollateralized component of the capacity may be allocated. The collateralized capacity
will be available at the Reserve Bank that approved the maximum daylight overdraft capacity
and holds the collateral.

35
A copy of the FR 2225 report and instructions is available at
www.federalreserve.gov/boarddocs/reportforms/default.cfm.
36
Descriptions of capital measures, by type of institution, and related regulatory reports can be found in
appendix C.

Special Situations 26
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B. Nonbank Banks and Industrial Banks
Nonbank banks grandfathered under the Competitive Equality Banking Act of 1987
(CEBA), as implemented in section 225.52 of Federal Reserve Regulation Y, industrial banks, or
industrial loan companies may not incur daylight overdrafts on behalf of affiliates, except in
three circumstances. First, the prohibition does not extend to overdrafts that result from
inadvertent computer or accounting errors beyond the control of the nonbank bank. Second,
nonbanks, industrial banks, and industrial loan companies are permitted to incur overdrafts on
behalf of affiliates that are primary U.S. government securities dealers, provided such overdrafts
are fully collateralized. Third, overdrafts incurred in connection with an activity that is financial
in nature are also permitted.37 A nonbank bank, industrial bank, or industrial loan company loses
its exemption from the definition of bank under the Bank Holding Company Act if it incurs
prohibited overdrafts. For this purpose, an affiliate is any company that controls the nonbank
bank or industrial bank, is controlled by it, or is under common control with it.
Nonbank banks and industrial banks must comply with the PSR policy regarding net
debit caps in the same manner as other institutions and are subject to daylight overdraft fees,
calculated using the same methods as those applied to other institutions. In addition to the
regular monitoring for these institutions, the Federal Reserve monitors nonbank banks or
industrial banks that are grandfathered under CEBA using a separate formula to calculate CEBArelated intraday Federal Reserve account positions.
If a nonbank bank or industrial bank incurs overdrafts that are prohibited, the Reserve
Bank will request that the institution provide detailed information about activity processed for
affiliate accounts, so that it can determine whether the overdraft was incurred on behalf of an
affiliate. If the overdraft was on behalf of a primary dealer affiliate, the nonbank bank or
industrial bank is required to demonstrate that the overdraft was fully collateralized. If the
overdraft was on behalf of an affiliate and was financial in nature, the nonbank or industrial bank
is required to demonstrate the purpose of the overdraft as defined by section 4(k)(5) of the Bank
Holding Company Act. Nonbank banks and industrial banks that do not maintain accounts for
affiliates may file a letter with the Reserve Bank on an annual basis certifying that they do not
currently have affiliate accounts and that they will notify the Reserve Bank promptly should that
status change. (Appendix B provides a sample certification letter.)
C. Institutions Subject to Daylight Overdraft Penalty Fees
Under the PSR policy, institutions that have Federal Reserve accounts but lack regular
access to the discount window are not eligible for a positive daylight overdraft cap. These
institutions should not incur any daylight overdrafts. If such an institution were to incur an
overdraft, however, the Reserve Bank would generally require it to pledge collateral sufficient to
cover the peak amount of the overdraft for a specified period.

37
Information concerning the definition of “financial in nature” can be found within the Federal Reserve’s
Regulation Y, located at http://www.federalreserve.gov/regulations/regref.htm#y.

Special Situations 27
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The institutions described below are subject to a penalty fee on any daylight overdrafts
incurred in their Federal Reserve accounts. The penalty fee is intended to provide a strong
incentive for these institutions to avoid incurring any daylight overdrafts in their Federal Reserve
accounts. The penalty fee is assessed at a rate equal to the regular daylight overdraft fee plus 100
basis points (annualized, 24-hour rate). The penalty fee is calculated and assessed in the same
manner as the daylight overdraft fee charged other institutions, as described in section IV, with
the following exceptions: No deductible is used in the calculation, there is no fee waiver
provision, and if the calculated charges in any two-week reserve maintenance period are less than
$25, a minimum fee of $25 will be charged.
Edge and agreement corporations38
Edge and agreement corporations do not have regular access to the discount window and
should refrain from incurring daylight overdrafts in their Federal Reserve accounts. In the event
that any daylight overdrafts occur, the Edge or agreement corporation must post collateral to
cover the overdrafts. Like foreign banks, Edge and agreement corporations that have branches in
more than one Federal Reserve District are monitored on a consolidated basis.
Bankers’ banks39
Bankers’ banks, including corporate credit unions, are exempt from reserve requirements
and do not have regular access to the discount window. Bankers’ banks may voluntarily waive
their exemption from reserve requirements and thus gain regular access to the discount window.
Such bankers’ banks would be free to establish net debit caps and would be subject to the PSR
policies in the same manner as other institutions. Those bankers’ banks that have not waived
their exemption from reserve requirements should refrain from incurring overdrafts and must
post collateral to cover any daylight overdrafts they do incur.
Limited-purpose trust companies40
The Federal Reserve Act permits the Board to grant Federal Reserve membership to
limited-purpose trust companies subject to conditions the Board may prescribe. As a general
matter, member limited-purpose trust companies do not accept reservable deposits and do not
have regular discount-window access. Limited-purpose trust companies that maintain Federal
Reserve accounts should refrain from incurring overdrafts and must post collateral to cover any
daylight overdrafts that they incur.

38

These institutions are organized under section 25A of the Federal Reserve Act (12 U.S.C. 611-631) or
have an agreement or undertaking with the Board of Governors under section 25 of the Federal Reserve Act (12
USC 601-604(a)).
39
For the purposes of the Federal Reserve’s PSR policy, a bankers' bank is a financial institution that is not
required to maintain reserves under the Federal Reserve's Regulation D (12 CFR 204) because it is organized solely
to do business with other financial institutions, is owned primarily by the financial institutions with which it does
business, and does not do business with the general public. Such bankers’ banks also generally are not eligible for
Federal Reserve
Bank credit under the Board’s Regulation A (12 CFR 201.2(c)(2)).
40
For the purposes of the PSR policy, a limited-purpose trust company is a trust company that, because of
limitations on its activities, does not meet the definition of “depository institution” in section 19(b)(1)(A) of the
Federal Reserve Act (12 USC 461(b)(1)(A)).

Special Situations 28
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Government-sponsored enterprises (GSEs) and international organizations41
The Reserve Banks are fiscal agents for certain GSEs and international organizations in
accordance with federal statutes. These institutions are not subject to reserve requirements and
do not have regular access to the discount window. GSEs and international organizations should
refrain from incurring daylight overdrafts and must post collateral to cover any daylight
overdrafts they do incur.

41

GSEs include Fannie Mae, the Federal Home Loan Mortgage Corporation (Freddie Mac), entities of the
Federal Home Loan Bank System (FHLBS), the Farm Credit System, the Federal Agricultural Mortgage
Corporation (Farmer Mac), the Financing Corporation, and the Resolution Funding Corporation. The international
organizations include the World Bank, the Inter-American Development Bank, the Asian Development Bank, and
the African Development Bank. The Reserve Banks ceased to act as fiscal agents for new issues of Sallie Mae
securities upon its privatization on December 29, 2004. The new Sallie Mae is not considered a GSE.

Self-Assessment Procedures 29
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VI. Self-Assessment Procedures
This section provides information and guidelines for institutions choosing to
perform a self-assessment to establish a net debit cap in the average, above average, or high
categories.42 If an institution elects to establish a net debit cap through a self-assessment it
must analyze and evaluate four components:
•

Creditworthiness

•

Intraday funds management and control

•

Customer credit policies and controls

•

Operating controls and contingency procedures.

The institution must assign a rating based on its assessment to each of the above
components and then combine the ratings to determine the appropriate net debit cap category.
Part E of this section provides a matrix that must be used to combine the four components into a
single rating. Appendix A contains worksheets that should be used in conducting an assessment.
A Reserve Bank reserves the right to evaluate independently the four factors of an institution’s
self-assessment. If the Reserve Bank arrives at an overall rating that is lower than that
determined by the institution, the Reserve Bank’s evaluation will determine the institution’s cap
category. In addition, section II of this manual provides information on filing a resolution to
establish the cap once the self-assessment has been completed, and appendix B provides sample
resolutions.
A. Creditworthiness Component
For most institutions, the appropriate net debit cap category is principally
determined by the institution’s most-recent supervisory ratings and, for domestically
chartered institutions, the institution’s capital category.43 In the self-assessment, an
institution’s creditworthiness is assigned one of the following ratings: excellent, very good,
adequate, or below standard. An excellent or a very good rating indicates that an institution
has demonstrated a sustained level of financial performance above its peer group norm. As
a general matter, fundamentally sound institutions that are experiencing only modest
weakness will receive a rating of adequate. The financial performance of such institutions
is usually at or just slightly below the peer norm.

42
An institution’s cap category in combination with an institution’s capital measure determines its net debit
cap. Domestically chartered institutions use 100 percent of their risk-based capital as their capital measure. U.S.
branches or agencies of foreign banks use a percentage of their worldwide capital, based on their financial holding
company (FHC) status and their SOSA ranking, as their capital measure. For more information on the calculation of
U.S. branch
and agency capital measure calculation, please see section V.
43
For the purposes of the self-assessment procedures, a domestically chartered institution’s capital category
is defined by the Federal Deposit Insurance Act.

Self-Assessment Procedures 30
_________________________________________________________________________
If an institution’s creditworthiness rating is adequate or higher, it may then proceed to
rate the other three components in the self-assessment process, subject to the provisions
regarding affiliated entities, discussed below. The institution’s assessment of the other three key
components will determine whether its composite rating will be lower than or equal to that
determined by the creditworthiness component. The rating should be recorded in the assessment
worksheet found in appendix A.
Matrix approach to assessing creditworthiness
In most instances, an institution’s creditworthiness component is determined by the
creditworthiness matrix, which translates an institution’s supervisory rating and, for domestically
chartered institutions, the institution’s capital category, into a creditworthiness assessment. This
approach is designed to simplify the process of assessing creditworthiness. Domestically
chartered institutions should use table VI-1 to determine their creditworthiness component, and
U.S. branches and agencies of foreign banks should use table VI-2.
Certain conditions, however, may affect the creditworthiness of the institution and, as a
result, the Reserve Bank may require the institution to perform a full assessment of its
creditworthiness. A full assessment of creditworthiness includes an assessment of capital
adequacy, key performance measures (including asset quality, earnings performance, and
liquidity), and the condition of affiliated institutions. The institution’s primary regulator may
review the full assessment. The Reserve Bank may, in consultation with the primary supervisor,
deny an institution access to intraday credit or modify the institution’s net debit cap. Examples
of certain conditions that warrant an institution’s performing a full assessment of its
creditworthiness, regardless of an institution’s supervisory ratings or capital category, are
•

If the institution is a financial holding company (FHC) and is in a cure period44

•

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

Procedures for completing a full assessment of creditworthiness are contained in
appendix A, along with the worksheets that may be used for this process. In its self-assessment
submission, an institution performing a full assessment of creditworthiness must cite the critical
factors that would support a proposed creditworthiness rating differing from that indicated by the
matrix approach. For example, such factors might include the establishment of a firm plan to
achieve a level of capital commensurate with a designation of adequately capitalized, which has
been approved by the institution’s primary supervisor and Reserve Bank. Significant
enhancements in the institution’s available liquidity or reductions in its problem assets could also
be used to support a higher rating in the context of a full assessment of creditworthiness.
However, the reasons for greater emphasis on other factors should be well documented in the
submission by the institution’s management. Regardless of the results of the full assessment of
creditworthiness, the creditworthiness rating achieved is not necessarily related to or reflective of
44
A cure period is a provisional time period where an institution is allowed to resolve issues related to its
noncompliance with regulatory requirements.

Self-Assessment Procedures 31
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the rating that would result from a regulatory examination.
Table VI – 1: Creditworthiness Matrix for Domestically Chartered Institutions*
Supervisory composite rating45
Capital category
Strong

Satisfactory

Fair

Marginal or
unsatisfactory

Well capitalized

Excellent

Very good

Adequate

Below
standard

Adequately
capitalized

Very good

Very good

Adequate

Below
standard

Undercapitalized

**

**

Below
standard

Below
standard

Significantly or
critically
undercapitalized

Below
standard

Below
standard

Below
standard

Below
standard

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

Under the matrix approach, a domestically chartered institution with capital ratios within
the category of well capitalized or adequately capitalized and with a supervisory composite
rating of strong, satisfactory, or fair will generally qualify for a positive net debit cap category.
An institution that has received a supervisory rating of marginal or unsatisfactory, or has capital
ratios within the significantly or critically undercapitalized category would receive a below
standard rating for creditworthiness and would not qualify for a positive net debit cap. A below
standard rating would also be assigned if an institution received a supervisory rating of fair and
its capital ratios fall within the undercapitalized category. In these situations, the primary
supervisor will have communicated to the institution’s directors and management its concerns
with respect to capital, asset quality, or other less-than-satisfactory conditions. Supervisory
actions will also have been initiated requiring prompt corrective action in order to prevent further
impairment of the institution’s viability. For institutions whose supervisory composite rating is
45
Supervisory composite ratings, such as the Uniform Bank Rating System (CAMELS), are generally
assigned on a scale from 1 to 5, with 1 being the strongest rating. Thus, for the purposes of the Creditworthiness
Matrix, a supervisory rating of 1 is considered Strong; a rating of 2 is considered Satisfactory; a rating of 3 is
considered Fair; and so on.

Self-Assessment Procedures 32
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Strong or Satisfactory and whose capital ratios fall within the category of undercapitalized, the
institution must perform a full assessment of creditworthiness.
Table VI – 2: Creditworthiness matrix for U.S. branches and agencies of foreign banks

SOSA ranking46

U.S. Operations Supervisory Composite Rating*
Strong

Satisfactory

Fair

Marginal or
unsatisfactory

SOSA 1

Excellent

Very good

Adequate

Below
standard

SOSA 2

Adequate

Adequate

**

Below
standard

SOSA 3

Below
standard

Below
standard

Below
standard

Below
standard

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

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

Affiliated institutions
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 allows the
Federal Deposit Insurance Corporation (FDIC) to hold an insured institution liable for any losses
46
In October 2000, Strength of Support Assessment (SOSA) rankings were made available to foreign
banking organizations’ (FBOs’) management and the FBOs’ home country supervisor. For full text, see SR Letter
00-14 (SUP), Enhancements to the Interagency Program for Supervising the U.S. Operations of Foreign Banking
Organizations, October 23, 2000.

Self-Assessment Procedures 33
_________________________________________________________________________
incurred from the failure of a commonly controlled institution. Thus, an institution could
become insolvent should the deposit insurer elect to assess the institution the costs incurred from
a failed commonly controlled institution. For institutions that are affiliates of a multibank
holding company, the creditworthiness rating would be affected if the condition of one or more
of the commonly controlled institutions is deemed marginal or unsatisfactory by the primary
supervisor and one or more of these institutions represents a material portion of the
organization’s consolidated assets or materially affects the organization’s consolidated
operations. Appendix A contains worksheets that should be used to incorporate the condition of
affiliates into the supervisory composite rating. This situation may arise when a supervisory
agency discloses material operating or financial weakness within the parent company, or
affiliated institutions, that pose significant risk to an institution. When such situations arise, the
Reserve Bank will assign the institution a zero cap.
If the parent company and related affiliates are in satisfactory condition, no further
adjustment needs to be made to the results of the institution’s self-assessment. Such findings will
normally be supported by evidence that the holding company serves as a source of strength to the
institution; that is, it is willing and able to provide capital contributions or other managerial and
financial support to the institution. If the management performing the assessment does not have
the information needed for assessing the condition of affiliated institutions, it should confer with
the financial officers of the holding company.
U.S. branches and agencies of foreign banks
An FBO should undergo the same self-assessment process as a domestic bank in
determining a net debit cap for its U.S. branches and agencies. U.S. branches and agencies of
foreign banks, however, cannot be separated from the FBO. As a result, all of 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.
In addition, because many FBOs do not have the same management structure as U.S.
institutions, the FBO may need to adjust its internal review of its self-assessment and cap
category. If an FBO’s board of directors has a more-limited role in the bank’s management than
a U.S. board has, the self-assessment and cap category should be reviewed by senior
management at the FBO’s head office that exercises authority over the FBO equivalent to the
authority exercised by a board of directors over a U.S. institution. In cases in which the board of
directors exercises authority equivalent to that of a U.S. board, cap determination should be
made by the board of directors.
In addition, for FBOs, the file that is made available for examiner review by the U.S.
offices of an FBO should contain the report on the self-assessment that the management of U.S.
operations made to the FBO’s senior management and a record of the appropriate senior
management’s response or the minutes of the meeting of the FBO’s board of directors or other
appropriate management group, at which the self-assessment was discussed.
Because the creditworthiness of the U.S. branch or agency of a foreign bank reflects the
creditworthiness of the entire organization and the condition of the U.S. operations, the Federal

Self-Assessment Procedures 34
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Reserve’s PSR program uses SOSA rankings and U.S. Operations Supervisory Composite
Ratings to determine an FBO’s creditworthiness. In addition, if the ARB is unable to obtain
adequate information regarding the creditworthiness of the institution, the ARB may assign the
institution a net debit cap of zero.
Supervisory examination and rating information relating to domestically chartered institutions
and foreign banking organizations.
Examination reports and any correspondence from supervisory agencies regarding the
institution’s condition, including supervisory ratings and any of its components, are considered
confidential information. Consequently, an institution’s management must ensure that
supervisory information is provided only to appropriate individuals within the institution,
supervisory agencies, and Reserve Banks.
B. Intraday Funds Management and Control
The purpose of the analysis of intraday funds management and control is to assess an
institution’s ability to fund its settlement obligations on a daily basis across all payment systems
in which it participates. The analysis requires the involvement of funds management, credit, and
operations personnel and a review of payments activity over a period of time. A Payment Flows
Worksheet is provided in appendix A (table A-3) to assist institutions in analyzing their daily
payment activity.
To obtain a complete understanding of its funds movements, an institution should have a
good understanding of its daily use of intraday credit as well as its use of intraday credit on
average over two-week periods. The analysis should cover a sufficient period of time so that an
institution can determine its peak demand for intraday credit and can also establish its average
use of such credit. The more volatile an institution’s payments activity, the longer the interval
that should be selected for analysis. The analysis will need to incorporate all operational areas
with access to payments systems. In addition to large-dollar funds and book-entry securities
transfer activity, the review should address check clearing, ACH, currency operations, and other
payment activity that results in relatively large-value settlement obligations. Thus, the analysis
should not be limited to on-line payment systems, nor should it be limited to payment systems to
which the institution has on-line access. Additionally, institutions with direct access to Fedwire
or other payment systems in more than one Federal Reserve District must combine all of these
access points into a single integrated analysis.
In performing the analysis, the institution should consider both liquidity demands and the
potential credit risks associated with participation in each payment system. The institution’s
capacity to settle its obligations in both routine and nonroutine circumstances should be carefully
assessed. A complete assessment of an institution’s ability to control its intraday obligations
extends, in many cases, beyond its ability to control its use of Federal Reserve intraday credit
within the constraints of its net debit cap. Importantly, it also extends to the institution’s ability
to control its position across all payment systems to a level that permits it to fund its obligations
on a regular basis. This type of assurance requires an institution to understand fully the nature of

Self-Assessment Procedures 35
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its obligations and to establish systems that permit it to monitor daily activity and to respond to
unusual circumstances.
Liquidity requirements
An institution participating on one or more large-dollar clearing and settlement systems
must manage its position on each system, comply with net debit caps or other risk controls on
each system, and assure itself that it has the capacity to satisfy all of its settlement obligations
each business day. Other privately operated, large-dollar systems used by institutions include the
Clearing House Interbank Payments System (CHIPS) and Depository Trust Company (DTC).
To assess its average daily liquidity requirements, an institution participating on multiple
systems should determine the magnitude and relative importance of the various payments
flowing through its Federal Reserve account as well as the payments flowing over each privately
operated clearing and settlement system. For each payment service used, liquidity sources
should be assessed to determine whether sufficient funding is regularly obtainable to satisfy
obligations. In making this assessment, an institution should consider the creditworthiness of its
counterparties as well as its customers. In addition, it should consider potential liquidity
demands associated with the default of another participant in a privately operated clearing and
settlement arrangement, such as CHIPS, DTC, a local check clearinghouse, a privately operated
ACH system, an automated teller machine or point-of-sale network, or a credit card settlement
arrangement. The institution’s capability to obtain the necessary funding before the end of a
business day in the event that a major counterparty, correspondent, customer, or member of a
privately operated clearing and settlement system were to default on its net settlement
obligations is particularly important in this assessment.
For example, if a customer that is an active user of payment services and also a
significant user of intraday credit were unable to cover its settlement obligations, an institution
would need to be able to fund those obligations by the close of business on the given settlement
day. Similarly, if a participant in a local check clearing arrangement were to default on its
settlement obligation, it is likely the settlement for that arrangement would be recast and each of
the other participants in the arrangement would experience a change in its net settlement
obligation. Participants in such arrangements should review the rules of the arrangement and
determine the credit and liquidity risks to which they are exposed. In each of these cases,
management should ensure that it has the capability to obtain the necessary funding late in the
day to cover such unexpected occurrences.
Monitoring and control capabilities
Once the payment environment has been defined, the institution should evaluate its
account monitoring capability. Organizations that have branches operating in more than one
Federal Reserve District and have more than one Federal Reserve account, such as U.S. branches
and agencies of foreign banks, should determine how the institution’s net debit cap will be
allocated across its accounts, and each office maintaining a Federal Reserve account should be
responsible for monitoring its account within the constraint of its cap allocation. At the same
time, one office should be assigned the responsibility to oversee consolidated payment activity,
and the self-assessment should reflect the monitoring capability of the consolidated entity. The

Self-Assessment Procedures 36
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designated office will be expected to be knowledgeable of the payment activity at all offices and
be able to respond to questions received from the Federal Reserve or the institution’s primary
supervisor.
Monitoring capabilities may be classified as real-time or periodic. A real-time
monitoring system accounts for each large-dollar funds transfer, book-entry securities transfer,
and net settlement entry as it is sent or received and recognizes “off-line” activity, such as check
and ACH, as data become available or in a manner that reflects the Federal Reserve’s posting
rules for payments settled through Federal Reserve accounts.47 Institutions participating on
multiple large-dollar systems may use several monitoring systems to track activity. A periodic
monitoring system provides balance information reflecting Fedwire funds and book-entry
securities transfer activity or other large-dollar transactions, such as CHIPS messages, plus
off-line transactions at specific intervals, such as every fifteen minutes, thirty minutes, or hour.
C. Customer Credit Policies and Controls
The assessment of an institution’s customer credit policies and controls requires the
following distinct analyses:
•

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

•

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

The analyses require the involvement of both credit and operations personnel and should
focus on the creditworthiness of all customers, including corporate and other institutions, that are
active users of payment services. In addition, the creditworthiness of correspondents and all
counterparties on privately operated clearing and settlement systems should be assessed.
For institutions that have arranged with a third-party service provider to process
payments, it is recognized that certain operational controls may be established in either the funds
and book-entry securities transfer operation of the service provider or the institution’s own
operation, depending on the nature of the arrangement. In any case, the standards for customer
credit control and monitoring are to be applied uniformly and extended to the service provider’s
operation as appropriate.48
General credit policies
The assessment of credit policies is one of the most important components of the selfassessment because credit policies are essential in controlling the risks faced by the institution.
The purpose of this analysis is to evaluate how effectively an institution controls the credit risk to
47
The schedule of posting rules is located in part II of the PSR policy, available at
www.federalreserve.gov/paymentsystems/psr/policy.pdf
48
For more information, please see Outsourcing of Information and Transaction Processing, SR Letter
00-4, February 29, 2000.

Self-Assessment Procedures 37
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which it is exposed in extending interday and intraday credit in connection with the provision of
payment services to customers that maintain accounts with the institution. The section also
addresses the credit risk faced by the institution from correspondents and counterparties on
privately operated clearing and settlement arrangements. There are several elements to the
analysis. First, the institution’s formal credit policies should be assessed. Second, customers
that are active users of payment services should be identified, as should the institution’s
correspondents and counterparties on privately operated clearing and settlement systems. Third,
the approach used to assess the creditworthiness of customers and correspondents and the
method used to establish credit limits for counterparties on privately operated clearing and
settlement systems should be reviewed.
Sound credit policies should address all credit relationships the institution has with a
customer, both explicit lending and intraday lending as a result of providing payment services.
Fundamentally, the institution must establish
•

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

•

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

•

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

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

Self-Assessment Procedures 38
_________________________________________________________________________
the credit risk posed by participants centrally. In these systems, individual participants may not
be able to control explicitly the exposure they face from other participants by setting credit
limits. For these types of systems, institutions should assess the exposure they might face due to
a participant’s default by assessing the value of transactions exchanged with other participants or
the loss allocation methodology employed by the system. Institutions should ensure that they
would have the ability to fund a change in their settlement position were a participant on such a
system unable to settle.
Assessment of customer, correspondent, and counterparty creditworthiness
For all accountholders that are identified as being active users of payment services,
whether they are financial institutions or corporate customers, the institution should evaluate
each customer’s creditworthiness and determine the amount of intraday credit it is willing to
provide to each customer. The establishment of intraday credit limits should be consistent with
the institution’s overall relationship with the customer. In addition, such credit limits should be
set conservatively and should not exceed a customer’s typical payment needs, even if the
customer has a very high credit rating. Credit limits should be comprehensive and cover all
payments processed on behalf of each customer. Further, for customers that use ACH services or
other services that create interday risk, interday credit limits (or prefunding requirements that
would preclude credit extensions) for such services should be established as well.
If an institution deals with correspondents, the institution should determine the value of
transactions cleared through each correspondent as well as other exposures that it faces from
each correspondent and establish limits on those exposures that reflect the institution’s
assessment of the creditworthiness of each correspondent. In the case of counterparties on
privately operated large-dollar clearing and settlement systems, institutions should determine the
amount of credit they are willing to extend to each of the other participants on the system. These
limits should be set conservatively, and they should take into consideration other exposures to
the counterparty, such as correspondent and respondent relationships and other privately operated
systems on which the institution participates.
For accountholders as well as correspondents and counterparties on private clearing and
settlement systems, changes in payment practices as well as changes in financial condition
should be monitored on a regular basis. If changes are identified, steps should be taken to
reassess credit limits, direct payment activity to other institutions, change bilateral credit limits,
or modify the methods used to control the payment services provided to the institution.
Monitoring customer activity
Once the active customers have been identified, the systems used to monitor those
customers’ payment activity, both intraday and interday, should be reviewed. These systems
need not be complex automated systems that fully integrate every transaction. Rather, the
systems should monitor and control all significant transactions processed for the customer. It is
reasonable to assume that all large-dollar funds and book-entry securities transfers should be
included in any monitoring system. If the customer collects high-dollar volumes of checks, uses
the ACH mechanism extensively, makes large cash deposits, or is an active participant in
securities markets, such activity should also be reflected in monitoring systems. Additionally, if

Self-Assessment Procedures 39
_________________________________________________________________________
the institution decides not to include certain types of transactions in monitoring systems on a
regular basis, procedures should be established to track other transactions that might materially
affect the customer’s’ use of intraday and interday credit.
In many institutions, separate monitoring systems have been established to monitor
customer activity by type of business, such as funds activity or government securities activity, or
to monitor each of a customer’s accounts separately. While such approaches can be used to
control risk through the allocation of credit limits among the various monitoring systems, they do
not permit institutions to observe closely the aggregate position of a customer and to identify
unusual behavior quickly. Attempts should be made to establish interfaces among diverse
monitoring systems. Such interfaces could be achieved by providing access to all monitoring
systems to the account officer or by designating a primary system to which data could be fed
from other systems periodically to provide one consolidated view of customers’ intraday and
interday positions.
Intraday Payment Activity. Intraday monitoring systems should reflect the customer’s
opening balance at the beginning of the day, and material transactions should be posted to the
account as information regarding the transactions becomes available throughout the day. If
certain customers are required to pledge collateral to protect the institution providing credit to
them, procedures should ensure that the collateral is acceptable. Monitoring systems should
capture the market value or other assigned value of the collateral and ensure that intraday
extensions of credit are adequately secured. Further, monitoring systems must have the
capability to identify any transaction that would result in a credit limit being exceeded and to
hold that transaction until an account officer reviews it and determines how the transaction
should be handled.
To control the risk associated with clearing and settling for book-entry securities
transfers, institutions should assess the creditworthiness of their customers and ensure that the
customer has the ability to fund consistently its daily activity. In this respect, it is important for
institutions to understand the intraday flows associated with their customer’s book-entry
securities activity in order to gain an understanding of peak funding needs. Depending upon the
creditworthiness of the customer and the nature of the activity, an institution might require its
customers to take any or all of the following steps:
•

Advise the institution of expected incoming securities transfers.

•

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

•

Collateralize all intraday overdrafts.

Interday Payment Activity. To control interday risk arising from the origination of ACH
credit transactions, institutions should also establish interday monitoring systems. The credit
limits in those systems should be set in conjunction with each customer’s overall interday credit

Self-Assessment Procedures 40
_________________________________________________________________________
limit. Institutions should periodically assess the creditworthiness of their customers and ensure
that the established credit limits continue to be appropriate. For customers in weak financial
condition, institutions should have the capability to pend or reject, in real time, transactions that
would exceed credit limits for these customers.
To control the return item risk associated with originating ACH debit transactions and
collecting checks on behalf of customers, an institution should ensure that each customer has the
capability to pay return items after it has been granted funds availability by the institution. In
addition, if a customer’s financial condition begins to deteriorate, the institution should analyze
the customer’s return-item history and delay availability of funds or place holds on the account,
as appropriate.
D. Operating Controls and Contingency Procedures
The purpose of the analysis of operating controls and contingency procedures is to assess
the integrity and the reliability of an institution’s payment operations to ensure that they are not a
source of operating risk. The integrity of operations is of particular concern because operational
errors and potential fraud can increase the cost of payment services and can undermine the
confidence of the public in the payments mechanism. Similar results can occur if payment
systems are unreliable and parties making and receiving payments do not have confidence that
payments will be made on a timely basis.
The analysis of operating controls and contingency procedures is divided into two parts.
The first part discusses the principal controls that institutions should use in payment processing
to ensure that their operations are safe and secure. The second part discusses briefly the need for
sound contingency procedures as a means of increasing payments system reliability.
Controls over payment operations
Institutions providing electronic payment services should be aware of and employ a
comprehensive set of controls designed to ensure the integrity of payments and the processing
system, limit access to devices and systems to authorized personnel, and prevent fraudulent or
erroneous messages or payments from being initiated.
Within each broad category of controls there are numerous alternative solutions that may
be employed depending on the technology available, staffing levels, and the nature of the
customer base. The following discussion outlines the general controls that should be
implemented, the rationale for each control, and some examples of typical control arrangements.
Integrity of payments processing systems. Virtually all electronic payments systems use
computer software to process payments. Institutions should ensure that software is tightly
controlled so that it cannot be modified inadvertently or for fraudulent purposes. Methods of
accomplishing this include (1) using dual controls for changes to the production environment, (2)
conducting extensive user testing involving a wide range of test cases, (3) limiting the number of
people who have access to the system to a necessary few, (4) ensuring that the version of

Self-Assessment Procedures 41
_________________________________________________________________________
software that is tested is, in fact, the version put into production, and (5) limiting access to
system documentation only to authorized users.
On-line access to the payments-processing system. Once an electronic payments system
is put into production, the ability for employees or customers to initiate transactions should be
strictly limited to authorized individuals. Furthermore, the accuracy and validity of payments
created by authorized staff should be regularly monitored. Methods of accomplishing this
include (1) limiting physical access to payment-origination facilities, such as terminals, (2) using
log-on IDs and passwords, (3) changing passwords regularly and making sure they are not
written down or available to others, (4) using message authentication codes to ensure that
payments are not altered during storage or transmission, (5) establishing dual controls over
message creation (one person keys in, another person validates), and (6) maintaining good audit
trails of payments originated and received.
Off-line payment initiation and delivery processes. Electronic payment fraud may result
from poor controls over off-line payment initiation or delivery; “off-line” refers to the use of
telephones, letters, or facsimile machines. Institutions must ensure that messages originate from
and are delivered to authorized parties. In all cases, message integrity must be maintained.
Because access to a telephone or facsimile machine is difficult to control, the normal on-line
access controls cannot be used. Consequently, institutions should use procedures such as (1)
maintaining authorized lists of institution or customer personnel who can send or receive
payments, (2) using controlled code words known only to the two parties, (3) using multi-party
call-back procedures, (4) recording and monitoring telephone calls, and (5) using sequence
numbering schemes for maintenance of audit trails.
Authorized staff. Care should always be taken to screen personnel employed in or with
access to electronic payments areas, including programmers, analysts, computer operators,
managers, clerical staff, and custodial staff. Management should have complete confidence in
the honesty and integrity of all involved staff members. Controls, subject to appropriate statutes,
that can be employed could include the following: pre-employment screening, ongoing
monitoring of potential conflicts of interest, immediate removal from sensitive positions or
system access of personnel who have resigned or been terminated, and specific security controls
over access to offices and machines during nonbusiness hours.
Contingency procedures
Despite the current level of automation and technology in use in the financial industry,
situations arise that can cause significant interruptions in the provision of electronic payments
services. These interruptions can entail outages of short duration, such as temporary losses of
power and breaks in telecommunications, or longer, sometimes indefinite, outages, which may
be caused by fire, flood, and earthquake. Such occurrences not only place an institution and its
customers at risk but also can have serious systemic risk implications in the case of a very large
institution. When computer systems are not operational during such events, account balances
may be unavailable and normal investment and trading capabilities may be interrupted.

Self-Assessment Procedures 42
_________________________________________________________________________
Contingency procedures should be devised to cover three main areas of exposure: (1)
hardware and software systems, (2) data communications systems, and (3) physical operations
facilities. The following paragraphs outline the general areas of consideration and provide some
examples of typical control arrangements.
Hardware and software systems. Virtually any hardware or software system can
experience problems that cause normal processing to stop. Institutions should devise and
periodically test backup procedures to ensure that processing can be resumed on a sufficiently
timely basis to minimize institutional risk.
Techniques that can be employed to mitigate this risk include the following:
(1) redundant hardware and software to replace or take over operations from inoperable systems,
(2) off-line backup plans, accommodating a limited number of key electronic files or payments,
and (3) off-site disaster recovery facilities where computer operations can continue in case of a
major outage.
Data communications systems. It is possible for telecommunications facilities to be
unavailable to an institution even though computer systems are still running. Consequently,
institutions should have backup facilities for all key data communications capabilities, including
data security devices, to ensure that breaks in telecommunications service do not cripple the
institution’s operations and services. Techniques that can be used include backup leased or dial
access lines to in-house systems, external networks, and key customer locations, spare or
redundant equipment for such devices as modems, encryption boxes, and controllers, and off-line
communications procedures, where feasible.
Physical operations facilities. Electronic funds transfer operating areas, including the
area’s desks, telephones, terminals, personal computers, copying machines, and facsimile
machines, could be disabled in the event of a site disaster. Consideration should be given to the
following options:
•

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

•

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

•

Installing and testing telecommunications capabilities to the backup
site.

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

Self-Assessment Procedures 43
_________________________________________________________________________
E. Overall Self-Assessment Rating
Table VI-3 integrates the components of the self-assessment into an overall selfassessment rating that indicates the institution’s appropriate net debit cap category, subject to
Reserve Bank approval.
Table VI-3
Combined Assessment of Cap Category
Creditworthiness

Intraday
funds
management
& control

Customer
credit
policies &
controls

Operating
controls &
contingency
procedures

Overall
assessment
(cap
category)

Excellent

Strong

Strong

Satisfactory

High

Excellent

Strong

Satisfactory

Satisfactory

Above
average

Excellent

Satisfactory

Strong

Satisfactory

Above
average

Excellent

Satisfactory

Satisfactory

Satisfactory

Above
average

Very good

Strong

Strong

Satisfactory

Above
average

Very good

Strong

Satisfactory

Satisfactory

Average

Very good

Satisfactory

Strong

Satisfactory

Average

Very good

Satisfactory

Satisfactory

Satisfactory

Average

Adequate

Strong

Strong

Satisfactory

Average

Adequate

Strong

Satisfactory

Satisfactory

Average

Adequate

Satisfactory

Strong

Satisfactory

Average

Adequate

Satisfactory

Satisfactory

Satisfactory

Average

Below
standard

Any rating

Any rating

Any rating

Zero

Any rating

Unsatisfactory

Any rating

Any rating

Zero

Any rating

Any rating

Unsatisfactory

Any rating

Zero

Any rating

Any rating

Any rating

Unsatisfactory

Zero

Self-Assessment Worksheets A-44
_________________________________________________________________________
Appendix A: Self-Assessment Worksheets
The procedures and worksheets in this appendix were prepared for institutions to use as a
basis for completing a self-assessment required to establish a daylight overdraft net debit cap in
the average, above average, or high cap categories. Prior to performing the assessment,
institutions should carefully review section VI of this manual, which provides additional
discussion of the components of the assessment. Appropriate documentation supporting the
results of the assessment should be attached to all parts of the worksheets and kept on file for
review by the institution's primary supervisor. Comments on various factors essential to the
self-assessment may be attached as necessary, provided the comments reference the appropriate
worksheet.
The index below indicates the location of the various components of the self-assessment
including (1) creditworthiness, (2) intraday funds management and control, (3) customer credit
policies and controls, and (4) operating controls and contingency procedures. Institutions
normally must use the Creditworthiness Matrix method (1.A.), which relies on recent capital
levels and supervisory examination ratings, to determine their creditworthiness rating. The full
self-assessment of creditworthiness (1.B.) is permitted, or in some cases required, in certain
circumstances. These circumstances, which are discussed further in section VI of this manual,
might include a significant change in financial condition, the availability of additional
substantive information about the institution's financial condition not available at the time of the
last examination, or a significant improvement in areas of concern to the primary supervisor
since the last examination. All institutions should complete components 2, 3, and 4. Ratings for
the four components should be recorded in table A-4 to arrive at the institution’s final selfassessment rating.

Self-Assessment Worksheets A-45
_________________________________________________________________________
Index

Page

1. Assessment of Creditworthiness ...................................................................................................... 46
1.A. Creditworthiness Matrix Procedures .................................................................................... 46
1.B. Full Assessment of Creditworthiness Procedures................................................................. 49
1.B.i. Capital Adequacy.................................................................................................................. 51
1.B.ii. Key Performance Measures................................................................................................ 53
Asset Quality.............................................................................................................................. 53
Earnings Performance.............................................................................................................. 56
Liquidity..................................................................................................................................... 58
1.B.iii. Condition of Affiliated Institutions ................................................................................... 60
1.B.iv. Integrating the Three Factors ............................................................................................ 61
2. Assessment of Intraday Funds Management and Control ............................................................ 63
3. Assessment of Customer Credit Policies and Controls.................................................................. 65
3.A. Assessment of Credit Policies ................................................................................................. 65
3.B. Assessment of Customer, Correspondent, and Counterparty Creditworthiness .............. 66
3.C. Monitoring Customer and Counterparty Intraday Payment Activity............................... 67
3.D. Monitoring Customer Interday Payment Activity............................................................... 69
3.E. Overall Rating: Customer Credit Policies and Controls ..................................................... 70
4. Assessment of Operating Controls and Contingency Procedures ................................................ 71
4.A. Internal Operating Controls .................................................................................................. 71
4.B. Contingency Procedures ......................................................................................................... 73
4.C. Overall Rating: Operating Controls and Contingency Procedures ................................... 74
5. Combining the Four Components ................................................................................................... 75

Self-Assessment Worksheets A-46
_________________________________________________________________________
1. Assessment of Creditworthiness

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

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

Self-Assessment Worksheets A-47
_________________________________________________________________________
•

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

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

Self-Assessment Worksheets A-48
_________________________________________________________________________
Table A-1
Creditworthiness Matrix Summary

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

Supervisory
assessment

Capital
levels

Condition of
affiliates

Overall
creditworthiness

Strong

Well capitalized

Neutral

Excellent

Strong

Adequately capitalized

Neutral

Very good

Strong

Undercapitalized

Neutral

***

Satisfactory

Well capitalized

Neutral

Very good

Satisfactory

Adequately capitalized

Neutral

Very good

Satisfactory

Undercapitalized

Neutral

***

Fair

Well capitalized

Neutral

Adequate

Fair

Adequately capitalized

Neutral

Adequate

Fair

Undercapitalized

Neutral

Below standard

Marginal

Any level

Any rating

Below standard

Unsatisfactory

Any level

Any rating

Below standard

Any rating

Significantly undercapitalized

Any rating

Below standard

Any rating

Critically undercapitalized

Any rating

Below standard

Any rating

Any level

Negative

Below standard

*** Full assessment of creditworthiness must be performed.

Overall Creditworthiness Rating:

Self-Assessment Worksheets A-49
_________________________________________________________________________
1.B. Full Assessment of Creditworthiness Procedures
The following discussion covers the recommended method for completing the full
assessment of creditworthiness. The accompanying worksheets should serve as a guide in
completing this assessment. Institutions should record their ratings on these worksheets and in
the upper portion of table A-2.
There are three factors that must be considered in assessing creditworthiness:(1) capital
adequacy, (2) key performance measures, including asset quality, earnings performance, and
liquidity, and (3) the condition of affiliated institutions. In the self-assessment documentation,
each factor should be discussed separately and the rationale used to adjust or maintain the overall
creditworthiness rating should be explained. Exceptions or special considerations pertaining to
the evaluation must be discussed and documented for supervisory examiners.
An assessment that differs significantly from findings of the primary supervisor should be
particularly well documented and supported. It may be helpful to refer to the supervisor's
examination manuals for a description of the rating guidelines and procedures used to assess an
institution's condition. However, regardless of the results of the creditworthiness assessment, the
creditworthiness rating achieved is not necessarily related to or reflective of the rating that would
result from a regulatory examination. It should also be noted that the numerical benchmarks for
certain performance standards contained in these self-assessment procedures may be subject to
change.
In developing the assessment, the institution should compare its performance with
selected ratios and peer comparisons that are well recognized as performance standards by the
banking industry to determine its creditworthiness rating. The self-assessment may use
information derived from confidential internal sources, publicly available reports, or both. Some
common sources that provide the information needed for the creditworthiness assessment include
supervisory examination reports, management financial reports, supervisory performance
summaries, internal and external audit reports, rating agency reviews, and private-vendor
performance summaries. Performance summary reports, such as the Uniform Bank Performance
Report (UBPR) and the Bank Holding Company Performance Report (BHCPR), provide current
and historic financial peer data.49 Also, similar information is available from bank trade
associations, public accounting firms, rating agencies, and other private vendors.
An institution's performance should be assessed in relation to its percentile ranking
within the peer group. Care should be exercised when choosing an appropriate peer group.
Regional peer groups are not appropriate if the region is experiencing economic conditions that
result in a lower performance for the peer group as a whole. In such situations, it is appropriate
to use a national peer group. Strong performance may be indicated by a high percentile when
certain measures of earnings and capital are analyzed, or a low percentile when certain asset
quality and liquidity measures are considered. Also, when evaluating the relative rankings, both
current performance and performance trends should be considered.
49

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

Self-Assessment Worksheets A-50
_________________________________________________________________________
The following guidelines indicate appropriate ratings for performance relative to the peer
group:
•

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

•

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

•

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

•

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

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

Self-Assessment Worksheets A-51
_________________________________________________________________________
1.B.i. Capital Adequacy
In most cases, the FDICIA Capital Zones for Prompt Corrective Action will apply as the
regulatory standard and general baseline for the capital adequacy component of the assessment
of creditworthiness. Even for institutions that are not subject to risk-based capital requirements,
or for those that believe that a higher capital adequacy rating than that currently indicated by the
capital zones is warranted, these zones should be used as a guide in developing the capital
adequacy rating.
If an institution's capital levels are below any of the federal guidelines, the appropriate
self-assessment rating for creditworthiness is usually below standard. An institution may provide
information to the supervisory agencies and appropriate Reserve Bank to support a higher rating.
In such cases, an institution will not receive an overall creditworthiness rating better than
adequate. For instance, if an institution's capital ratios are below the regulatory standard but the
institution has firm plans to increase its capital, it may adjust its ratios upward; however,
evidence supporting the upward adjustment to the institution's original ratios should be fully
documented. In addition, the capital adequacy rating should be adjusted downward if capital has
declined since the last examination or if management expects that capital will decline to below
minimum acceptable levels.
A foreign bank that is not based in a country that adheres to the Basel Capital Accord
should compare capital ratios calculated under home country rules to the regulatory standard and
document analysis that supports a conclusion that its capital meets or exceeds the standard. In
addition, if other minimum capital ratios are prescribed by any of the supervisory agencies, the
institution must address its level of compliance with such measures as well.

Self-Assessment Worksheets A-52
_________________________________________________________________________
Capital Adequacy Worksheet

Institution
(original)

Institution
(adjusted*)

Regulatory
standard

Tier I capital/risk-weighted
Assets

4.0%

Total capital/risk-weighted
assets

8.0%

Tier I capital/total assets

3.0%

Peer

Other ratios:

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

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

____

Well capitalized

____

Adequately capitalized

____

Undercapitalized

____

Significantly undercapitalized

____

Critically undercapitalized

Capital Adequacy Rating:

Self-Assessment Worksheets A-53
_________________________________________________________________________
1.B.ii. Key Performance Measures
Asset Quality
Asset quality assessment is often based on the level and trend of non-performing and
classified assets. Such information is available from internal management reports, supervisory
examination reports, and external audit summaries. It is recognized that only limited information
may be available for peer group comparisons. Provided, however, that such information is
current, supervisory examination findings and comparisons pertaining to asset quality may serve
as a starting point.
For example, the level and trend of weighted classified assets as noted in the last
supervisory examination report should be reviewed. This measure reflects the probability of loss
that has not yet been recognized. “Weighted classified assets” is defined as the sum of (1) 20
percent of substandard, (2) 50 percent of doubtful, and (3) 100 percent of loss classifications not
already charged off. The dollar amount of weighted classified assets should be compared with
Tier I capital plus the loan loss reserve. The institution's ratio of total classified assets to total
capital should also be reviewed. “Total classified assets” is defined as the sum of all
substandard, all doubtful, and all loss classifications not already charged off. The total of
classified assets should be compared with Tier I capital plus the loan loss reserve. In particular,
the level and severity of classifications should be carefully evaluated, as should the trends in both
the classification categories and ratio itself. The assessment of this ratio is a useful analytical
complement to the weighted classification ratio.
Additionally, the level of “other real estate” owned as a percent of average assets
available, which is also an indicator of an institution's asset quality, should be considered.
Normally, unacceptable levels of other real estate owned will adversely affect earnings
performance. An institution exhibiting a negative trend with respect to other real estate or with
levels consistently above their peer group should assign a below standard rating to this area.
Institutions with levels consistently below their peer group or institutions exhibiting a positive
trend would not need to adjust their ratings.
Levels of delinquent, nonperforming, and non-accrual loans as a percentage of total loans
or as a percentage of the allowance for loan and lease losses should be reviewed. These
measures should then be compared with supervisory standards and peer group norms. Ratings
assigned to asset quality are derived by referring to the guidelines described in this section
regarding peer group comparisons. Other considerations that should be factored into the
evaluation of asset quality include management's demonstrated ability to collect problem credits,
an assessment of credit concentrations to particular industries or geographic regions, adequacy of
loan loss reserves, and changes in lending policies and practices.

Self-Assessment Worksheets A-54
_________________________________________________________________________
Asset Quality Worksheet

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

1.

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

Institution

Weighted
classified ratio

Rating

< 5%

Excellent

> 5% to 15%

Very good

> 15% to 30%

Adequate

> 30%

Below standard

Asset Quality Rating:

Self-Assessment Worksheets A-55
_________________________________________________________________________
Asset Quality Worksheet – continued

2.

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

Ratio

Peer

Percentile

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

Rating

< 10th

Excellent

> 10th to 25th

Very good

> 25th to 50th

Adequate

> 50th

Below standard

Self-Assessment Worksheets A-56
_________________________________________________________________________
Earnings Performance
The evaluation of earnings performance relies heavily upon comparisons of key
profitability measures (such as return on assets and return on equity) to industry benchmark and
peer group norms. Important considerations in the evaluation of earnings are quantity, quality,
and trend. Also, a number of other factors, such as the level of nonrecurring items, exposure to
interest rate movements, coverage of potential loan losses or losses on other assets, and
overhead, must be factored into the evaluation process. The following worksheet should assist in
the evaluation of return on assets.
An institution experiencing negative earnings should assign a rating of Below Standard to
this area. An excellent or a very good rating is reserved for institutions that exhibit strong,
consistent earnings performance relative to supervisory standards and their peer groups and have
no material weakness disclosed by their primary supervisors.

Self-Assessment Worksheets A-57
_________________________________________________________________________
Earnings Performance Worksheet

Institution

Peer

Percentile

ROA:

%

%

%

Adjusted ROA:

%

%

%

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

ROA Benchmarks:
Asset size
Rating

< $100
million

$100-$300
million

$300-$1,000
million

$1-$5
billion

>$5
billion

Excellent

1.15%

1.05%

0.95%

0.85%

0.75%

Very good

0.95

0.85

0.75

0.65

0.55

Adequate

0.75

0.65

0.55

0.45

0.35

Below
standard

<0.75

<0.65

<0.55

<0.45

<0.35

Earnings Performance Rating:

Self-Assessment Worksheets A-58
_________________________________________________________________________
Liquidity
An evaluation of liquidity involves a determination of the stability of the institution's
retail and wholesale funding sources as well as its ability to cover large unexpected funding
outflows. The assessment should include a review of the institution's historical and current
funding patterns, level of noncore funding, ability to access the money markets, and adequacy of
contingency liquidity plans. The following worksheet should facilitate the evaluation of the
institution’s dependency on non core funding sources.
An adequate rating may be assigned when liquidity measures are near peer group levels
and no material concerns have been disclosed by the primary supervisor. If undue reliance is
placed on noncore funding, a below standard rating is warranted. In addition, this rating may
apply when access to traditional funding sources declines because of market concerns regarding
the institution's condition. Excellent or very good ratings reflect institutions that have strong
funds management abilities, ready access to alternative funding sources, and adequate controls
for managing asset and liability risks.

Self-Assessment Worksheets A-59
_________________________________________________________________________
Liquidity Worksheet

Institution

Peer

Percentile

Net non core funding dependency
ratio:

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

Rating

< 10th

Excellent

> 10th to 25th

Very good

> 25th to 50th

Adequate

> 50th

Below standard

Liquidity Rating:

Self-Assessment Worksheets A-60
_________________________________________________________________________
1.B.iii. Condition of Affiliated Institutions
The condition of the holding company and related affiliates must be considered in the
analysis of the institution's condition. In the evaluation of the condition of an institution's parent
company and affiliates, emphasis should be placed on the most recent supervisory ratings of the
affiliated institutions. It is recognized that management may not have the information needed for
assessing the condition of affiliated institutions. In such situations, management should confer
with the financial officers of the holding company.
The condition of the parent company or affiliated institutions will have either a neutral or
negative impact on the institution completing the assessment. If the parent company and related
affiliates are in satisfactory condition, no further adjustment needs to be made to the results of
the institution's self-assessment. Such findings will normally be supported by evidence that the
holding company serves as a source of strength to the institution; that is, it is willing and able to
provide capital contributions or other managerial and financial support to the institution.
The creditworthiness rating of an institution would be adjusted to below standard if the
condition of one or more of the commonly controlled institutions was deemed marginal or
unsatisfactory by the primary supervisor and the institution or institutions represent a material
position of the organization's consolidated assets or materially affect the organization's
consolidated operations. This situation may arise when a supervisory agency discloses a material
operating or financial weakness within the parent company or affiliated institutions that pose
significant risk to the institution. When such situations arise, the institution will not qualify for a
positive net debit cap.
•

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

•

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

Condition of Affiliates Rating:

Self-Assessment Worksheets A-61
_________________________________________________________________________
1.B.iv. Integrating the Three Factors
In integrating the three factors (capital adequacy, key performance measures, and the
condition of affiliated institutions) into a single assessment, institutions should use table A-2. In
general, the rating assigned to key performance measures will not exceed the lowest of the
ratings for the three measures. Similarly, the ratings assigned to creditworthiness should not
normally exceed the ratings of any of the three factors. In general, because the factors are
interrelated, the ratings of the factors should correspond closely to the overall creditworthiness
rating. For example, an institution that has one of the key performance measures rated below
standard will be expected to have overall creditworthiness rated below standard. Usually, poor
asset quality or operating losses will reduce capital to levels associated with a below standard
rating and, as a result, the overall creditworthiness rating should be assigned accordingly. In
situations in which an institution's capital ratios were below the regulatory standard but the rating
for capital adequacy was adjusted upward based on other factors, the overall creditworthiness
rating assigned should not be greater than adequate.
In addition, the overall rating for creditworthiness should be adjusted to reflect factors
that could have a material impact on the institution's financial condition. Other factors that may
contribute to the assignment of the overall rating might include the following:
•

Major changes in the institution's management

•

Material prospective losses or recoveries

•

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

•

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

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

Self-Assessment Worksheets A-62
_________________________________________________________________________
Table A-2
Creditworthiness Self-Assessment Summary
PRIMARY MEASURE
CAPITAL ADEQUACY ASSESSMENT:
KEY PERFORMANCE MEASURES
ASSET QUALITY ASSESSMENT:
EARNINGS STRENGTH ASSESSMENT:
LIQUIDITY ASSESSMENT:
KEY PERFORMANCE MEASURES RATING:*
CONDITION OF AFFILIATES ASSESSMENT:
* (Equals the lowest of the ratings for the three performance measures.)

Capital
adequacy

Key
performance
measures

Condition of
affiliates

Overall
creditworthiness

Well capitalized

Excellent

Neutral

Excellent

Adequately capitalized

Excellent

Neutral

Very good

Well capitalized

Very good

Neutral

Very good

Adequately capitalized

Very good

Neutral

Very good

Well capitalized

Adequate

Neutral

Adequate

Adequately capitalized

Adequate

Neutral

Adequate

Undercapitalized

Any rating

Any rating

Below standard

Significantly
undercapitalized

Any rating

Any rating

Below standard

Critically undercapitalized

Any rating

Any rating

Below standard

Any rating

Below
standard

Any rating

Below standard

Any rating

Any rating

Negative

Below standard

Overall Creditworthiness Rating:

Self-Assessment Worksheets A-63
_________________________________________________________________________
2. Assessment of Intraday Funds Management and Control
The purpose of the analysis of intraday funds management and control is to assess an
institution's ability to fund its settlement obligations daily across all payment systems in which
the institution participates. The analysis should include input from personnel in the funds
management, credit, and operations areas and should involve a review of payment flows activity
over time. The Payment Flows Worksheet (table A-3) is provided as a model to assist
institutions in analyzing their intraday payment activity. To the extent that an institution uses
other payment services that require large-dollar settlements, the worksheet should be expanded to
include them.
Yes
No
1.

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

2.

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

b.

c.

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

_____ _____

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

_____ _____

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

_____ _____

Rating of Intraday Funds Management and Control:
•

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

•

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

•

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

Intraday Funds Management and Control Rating:

Self-Assessment Worksheets A-64
_________________________________________________________________________
Table A-3
Payment Flows Worksheet
(Daily average dollar value)
Payment type

$ paid

% of
total

$ rec'd

% of
total

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

100%

100%

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

2

Self-Assessment Worksheets A-65
_________________________________________________________________________
3. Assessment of Customer Credit Policies and Controls
Yes

No

3.A. Assessment of Credit Policies
1.

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

_____ _____

Do the credit policies address interday and intraday credit
extensions?

_____ _____

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

_____ _____

4.

Are the policies reviewed periodically?

_____ _____

5

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

_____ _____

2.

3.

Rating of Credit Policies:
•

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

•

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

Self-Assessment Worksheets A-66
_________________________________________________________________________
3.B. Assessment of Customer, Correspondent, and Counterparty Creditworthiness
Yes
1.

2.

No

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

_____ _____

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

_____ _____

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

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

•

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

Self-Assessment Worksheets A-67
_________________________________________________________________________
3.C. Monitoring Customer and Counterparty Intraday Payment Activity
Yes
1.

Do customer and counterparty monitoring systems
a.

b.

c.

2.

b.

c.

4.

5.

Capture all significant transactions at least every 15
minutes?

_____ _____

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

_____ _____

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

_____ _____

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

3.

No

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

_____ _____

Do procedures ensure that collateral reasonably
reflects market values?

_____ _____

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

_____ _____

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

_____ _____

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

_____ _____

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

_____ _____

Self-Assessment Worksheets A-68
_________________________________________________________________________
Monitoring Customer and Counterparty Intraday Payment Activity-continued
Rating Customer Intraday Monitoring:
•

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

•

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

•

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

Self-Assessment Worksheets A-69
_________________________________________________________________________
3.D. Monitoring Customer Interday Payment Activity
Yes
1.

a.

b.

c.

2.

3.

No

Do interday monitoring systems for ACH credit transactions
capture
100 percent of the value of ACH credit transactions
originated by settlement date?

_____ _____

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

_____ _____

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

_____ _____

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

_____ _____

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

_____ _____

Rating Customer Interday Payment Activity:
•

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

•

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

•

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

Self-Assessment Worksheets A-70
_________________________________________________________________________
3.E. Overall Rating: Customer Credit Policies and Controls
The matrix below should be used to combine the ratings for the sections of this
component into an overall rating for the self-assessment.

Credit Policies

Customer &
counterparty
creditworthiness

Monitoring
intraday
payment activity

Monitoring
interday
payment
activity

Overall
customer credit
policies and
controls rating

Satisfactory

Satisfactory

Strong

Strong

Strong

Satisfactory

Satisfactory

Satisfactory

Strong

Satisfactory

Satisfactory

Satisfactory

Strong

Satisfactory

Satisfactory

Satisfactory

Satisfactory

Satisfactory

Satisfactory

Satisfactory

Unsatisfactory

Any rating

Any rating

Any rating

Unsatisfactory

Any rating

Unsatisfactory

Any rating

Any rating

Unsatisfactory

Any rating

Any rating

Unsatisfactory

Any rating

Unsatisfactory

Any rating

Any rating

Any rating

Unsatisfactory

Unsatisfactory

Overall Customer Credit Policies and Controls Rating:

Self-Assessment Worksheets A-71
_________________________________________________________________________
4. Assessment of Operating Controls and Contingency Procedures
Yes

No

4. A. Internal Operating Controls
1.

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

_____ _____

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

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

•

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

•

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

•

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

•

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

2.

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

_____ _____

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

_____ _____

3.

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

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

Self-Assessment Worksheets A-72
_________________________________________________________________________
Internal Operating Controls - continued
•

4.

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

Rating Internal Operating Controls:
•

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

•

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

Internal Operating Controls Rating:

Self-Assessment Worksheets A-73
_________________________________________________________________________
4.B. Contingency Procedures
Yes
1.

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

No

_____ _____

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

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

•

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

•

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

2.

3.

4.

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

_____ _____

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

_____ _____

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

_____ _____

Rating Contingency Procedures:
•

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

•

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

Contingency Procedures Rating:

Self-Assessment Worksheets A-74
_________________________________________________________________________
4.C. Overall Rating: Operating Controls and Contingency Procedures
If the rating for either internal operating controls or contingency procedures is
unsatisfactory, then an unsatisfactory rating results for this overall component. Otherwise, the
rating is satisfactory.

Operating Controls and Contingency Procedures Rating:

Self-Assessment Worksheets A-75
_________________________________________________________________________
5. Combining the Four Components
The individual component evaluations should be combined into an overall assessment
using table A-4 below.
Table A-4
Combined Assessment of Cap Category

Creditworthiness

Intraday
funds
management
& control

Customer
credit
policies &
controls

Operating
controls &
contingency
procedures

Overall
assessment
(cap category)

Excellent

Strong

Strong

Satisfactory

High

Excellent

Strong

Satisfactory

Satisfactory

Above average

Excellent

Satisfactory

Strong

Satisfactory

Above average

Excellent

Satisfactory

Satisfactory

Satisfactory

Above average

Very good

Strong

Strong

Satisfactory

Above average

Very good

Strong

Satisfactory

Satisfactory

Average

Very good

Satisfactory

Strong

Satisfactory

Average

Very good

Satisfactory

Satisfactory

Satisfactory

Average

Adequate

Strong

Strong

Satisfactory

Average

Adequate

Strong

Satisfactory

Satisfactory

Average

Adequate

Satisfactory

Strong

Satisfactory

Average

Adequate

Satisfactory

Satisfactory

Satisfactory

Average

Below standard

Any rating

Any rating

Any rating

Zero

Any rating

Unsatisfactory

Any rating

Any rating

Zero

Any rating

Any rating

Unsatisfactory

Any rating

Zero

Any rating

Any rating

Any rating

Unsatisfactory

Zero

Overall Self-Assessment Rating:

Sample Letters and Resolutions B-76
_________________________________________________________________________
Appendix B: Sample Letters and Resolutions
The sample letters and resolutions included in this appendix are intended for
institutions to use as models in complying with the Federal Reserve's PSR policy.
The de minimis cap resolution should be used by those institutions that did not conduct a
self-assessment but that require greater use of intraday credit than permitted under the exempt
cap category. The self-assessment resolution is required for those institutions that have
completed a self-assessment and intend to adopt an average, above average, or high cap category.
The maximum daylight overdraft capacity resolution should be completed by institutions that
have been approved by their Reserve Bank for collateralized daylight overdraft capacity above
their net debit cap. These cap resolutions are discussed further in section II of this manual.
In the resolution that is adopted by the board of directors, the words or phrases that
appear in parentheses in the following sample resolutions should be replaced with
appropriate text. In some cases, the options available are listed. When completing the selfassessment resolution, note the blank spaces shown to the left of the four components of the
self-assessment and the overall assessment rating. The appropriate values for these spaces
are to be selected from the following options:
Assessment Component

Rating options

Creditworthiness

Excellent
Very good
Adequate
Below standard

Intraday funds management
and control

Strong
Satisfactory
Unsatisfactory

Customer credit policies
and controls

Strong
Satisfactory
Unsatisfactory

Sample Letters and Resolutions B-77
_________________________________________________________________________
Operating controls and
contingency procedures

Satisfactory
Unsatisfactory

Overall assessment (Cap category)

High
Above average
Average
Zero cap

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

Sample Letters and Resolutions B-78
_________________________________________________________________________
Model Resolution 1
De Minimis Cap
I hereby certify that the following resolution was duly adopted at a meeting of the (type
of governing body/board of directors) of the (official name of institution) (the “Institution”),
duly authorized and existing under the laws of (state/United States) , which meeting was duly
called and held on the
day of
, 20 , and that those resolutions are now in full force and
effect and are not in conflict with any provisions in the certificate of incorporation, statutes, or
bylaws of the Institution.
WHEREAS, the Board of Governors of the Federal Reserve System has announced a
policy of reducing risks on payment systems that requires each depository institution that incurs
daylight overdrafts in its Federal Reserve account to adopt a net debit cap category; and
WHEREAS, this Institution desires to comply with the Federal Reserve's policy; and
WHEREAS, the board of directors has this day met and considered the report submitted
by management that addresses how the Institution plans to comply with the Federal Reserve's
policy and that makes recommendations regarding a net debit cap category,
NOW, THEREFORE, be it resolved that the board of directors hereby adopts the de
minimis cap as its net debit cap category.
RESOLVED, that these resolutions and all the powers and authorizations hereby granted
or confirmed shall continue in full force and effect until written notice of their revocation shall
have been given to and received by the Reserve Bank or for one year, whichever occurs earlier.
IN WITNESS HEREOF, I, the undersigned,
Institution, have hereunto subscribed my name.

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

(Cashier/Comptroller/Secretary) of the

Sample Letters and Resolutions B-79
_________________________________________________________________________
Model Resolution 2
Self-Assessment Cap
I hereby certify that the following resolution was duly adopted at a meeting of the (type
of governing body/board of directors) of the (official name of institution) (the “Institution”),
duly authorized and existing under the laws of (state/United States) , which meeting was duly
called and held on the
day of
, 20 , and that those resolutions are now in full force and
effect and are not in conflict with any provisions in the certificate of incorporation, statutes, or
bylaws of the Institution.
WHEREAS, the Board of Governors of the Federal Reserve System has announced a
policy of reducing risks on payment systems that requires each depository institution that incurs
daylight overdrafts in its Federal Reserve account to adopt a net debit cap category; and
WHEREAS, this Institution desires to comply with the Federal Reserve's policy; and
WHEREAS, the board of directors has this day met and considered the report submitted
by management that assesses the Institution's creditworthiness, intraday funds management and
controls, customer credit policies and controls, and operating controls and contingency
procedures, in accordance with the Federal Reserve's guidelines, and that makes
recommendations regarding self-assessment ratings, an overall self-assessment, and a net debit
cap category,
NOW, THEREFORE, be it resolved that the board of directors hereby adopts the
following self-assessment ratings and net debit cap category:
Creditworthiness
__________________
Intraday funds management and control
__________________
Customer credit policies and controls
__________________
Operating controls and contingency procedures
__________________
Overall assessment
__________________
Daylight overdraft cap category

(High, Above average, Average)

RESOLVED, that these resolutions and all the powers and authorizations hereby granted
or confirmed shall continue in full force and effect until written notice of their revocation shall
have been given to and received by the Reserve Bank or for one year, whichever occurs earlier.

Sample Letters and Resolutions B-80
_________________________________________________________________________
IN WITNESS HEREOF, I, the undersigned,
Institution, have hereunto subscribed my name.
(Signature of Secretary to the Board of Directors)
(Name of Depository Institution)
(Address)
(City, State, and Zip)
(Date)
(ABA Routing Number)

(Cashier/Comptroller/Secretary) of the

Sample Letters and Resolutions B-81
_________________________________________________________________________
Model Resolution 3
Maximum Daylight Overdraft Capacity
I hereby certify that the following resolution was duly adopted at a meeting of the (Type
of governing body/Board of directors) of the (Official name of institution) (the “Institution”),
duly authorized and existing under the laws of (State/United States) , which meeting was duly
called and held on the
day of
, 20 , and that those resolutions are now in full force and
effect and are not in conflict with any provisions in the certificate of incorporation, statutes, or
bylaws of the Institution.
WHEREAS, the Board of Governors of the Federal Reserve System has announced a
policy of reducing risks on payment systems that requires each depository institution that incurs
daylight overdrafts in its Federal Reserve account to adopt a net debit cap category, and, under
certain conditions, allows a depository institution to pledge eligible collateral for the purposes of
expanding intraday capacity beyond the net debit cap; and
WHEREAS, this Institution desires to comply with the Federal Reserve’s policy and
desires to expand its daylight overdraft capacity through the pledging of collateral; and
WHEREAS, the board of directors hereby has this day met and considered the report
submitted by management that assesses the Institution’s creditworthiness, intraday funds
management and controls, customer credit policies and controls, and operating controls and
contingency procedures, in accordance with the Federal Reserve’s guidelines; recommends selfassessment ratings, an overall self-assessment, and a net debit cap category; and assesses the
reasons and purposes for and recommends additional daylight overdraft capacity beyond the net
debit cap level, subject to the approval of the Federal Reserve Bank of ______________;
NOW, THEREFORE, be it resolved that the board of directors hereby adopts the
following self-assessment ratings and net debit cap category:
Creditworthiness

__________________

Intraday funds management and control

__________________

Customer credit policies and controls

__________________

Operating controls and contingency procedures

__________________

Overall assessment

__________________

Daylight overdraft cap category

(High, Above average, Average)

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

Sample Letters and Resolutions B-82
_________________________________________________________________________
and agrees to pledge collateral acceptable to the Federal Reserve Bank of ______________ in
form to support such increased usage.50
RESOLVED, that these resolutions and all the powers and authorizations hereby granted
or confirmed shall continue in full force and effect until written notice of their revocation shall
have been given to and received by the Reserve Bank or for one year, whichever occurs earlier.
IN WITNESS HEREOF, I, the undersigned,
Institution, have hereunto subscribed my name.

(Cashier/Comptroller/Secretary) of the

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

50

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

Sample Letters and Resolutions B-83
_________________________________________________________________________
Model Letter 1
Nonbank and Industrial Bank Certification Letter
Section 225.52(b)(2) of Federal Reserve Regulation Y prohibits nonbank banks and
industrial banks from incurring an overdraft on behalf of, or by, an affiliate at a Federal Reserve
Bank except under certain conditions. An affiliate is any company that controls an institution, is
controlled by an institution, or under common control with an institution.
Because (Official name of institution ) does not currently have any accounts for affiliates,
I hereby certify that any overdrafts incurred by our institution would not be in violation of
section 225.52 of Regulation Y. I further certify that the Federal Reserve will be notified should
the status regarding affiliate accounts change. This certification will be updated annually.
__________________________________
(Authorized Signature)
_________________________________
(Name)
__________________________________
(Title)
__________________________________
(Telephone Number)

Sample Letters and Resolutions B-84
_________________________________________________________________________
Model Letter 2
Foreign Bank Family Cap Allocation Letter

(Address to daylight overdraft contact at
Administrative Reserve Bank)

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

Cap Allocation (US $)

_______________

_____________

_______________

_____________

_______________

_____________

__________________________________
(Authorized Signature)

__________________________________
(Name)

__________________________________
(Title)

__________________________________
(Telephone Number)

Capital Measures C-85
_________________________________________________________________________
Appendix C: Capital Measures
This appendix provides information, by type of institution, on capital measures used
for daylight overdraft cap and fee calculation. In most cases, capital information is submitted
to the primary regulator or supervisor using specific forms and reports, which are indicated
below.
1. Most U.S. banks, including
•
•
•
•
•
•
•

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

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

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

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

Capital Measures C-86
_________________________________________________________________________
3. Other savings institutions, including
•
•

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

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

4. Credit unions:
•
•

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

These institutions report capital data on the NCUA Semiannual Financial Statistical
Report (NCUA 5300/S):
Regular reserves (Acct. 931) +
Investment valuation reserve (Acct. 668, 5300S only) +
Undivided earnings (Acct. 940) +
Other reserves (Acct. 658).

5. U.S. Branches and Agencies of Foreign Banks:
These institutions report capital data on the Annual Daylight Overdraft Capital Report for
U.S. Branches and Agencies of Foreign Banks (FR 2225):
Daylight overdraft capital base (line 3)
or
Report of Assets and Liabilities for U.S. Branches and Agencies of Foreign Banks
(FFIEC 002) Schedule RAL:
Net due to related depository institutions (Item 5.a., Column A (RCFD 2944)).
See section V for further information on capital measures for U.S. branches and agencies
of foreign banks.

Glossary 87
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GLOSSARY
Above-average cap—The cap category that permits an institution to incur daylight overdrafts on
a single day up to 1.875 times its capital measure and an average of its peak daily overdrafts
during any two-week reserve maintenance period up to 1.125 times its capital measure.
Account Balance Monitoring System (ABMS)—The Federal Reserve’s computer system that
provides account information to the Federal Reserve Banks and depository institutions on an
intraday basis. ABMS serves as both an informational source and a monitoring tool. This
information includes opening balances, funds and security transfers, nonwire accounting activity,
and DI cap and collateral limits.
Account Management Information (AMI)— AMI is an information tool available on FedLine
Web for institutions to use to access account management information, including real-time
account balances, daylight overdraft balances, statements of account, and cash management
services, or to make detailed transaction inquiries.
ACH—Automated clearinghouse. An electronic batch processing service used to disburse or
collect funds.
Administrative Reserve Bank (ARB)—The administrative Reserve Bank is responsible for the
administration of Federal Reserve credit, reserves, and risk management policies for a given
depository institution or other legal entity.
Affiliate—Any company that controls, is controlled by, or is under common control with, a bank
or nonbank bank (according to Federal Reserve Regulation Y).
Agreement corporation—A corporate subsidiary of a federal- or state-chartered bank having an
agreement or undertaking with the Board of Governors, under section 25 of the Federal Reserve
Act, to engage in international banking and investments.
Average cap—The cap category that permits an institution to incur daylight overdrafts on a
single day up to 1.125 times its capital measure and an average of its peak daily overdrafts
during any two-week reserve maintenance period up to 0.75 times its capital measure.
Average daily daylight overdraft—A institution’s average daily daylight overdraft is calculated
by dividing the sum of its negative Federal Reserve account balances at the end of each minute
of the scheduled Fedwire operating day (with positive balances set to zero) by the total number
of minutes in the scheduled Fedwire operating day.
Bank holding company (BHC) – Any company (including a bank) that has direct or indirect
control of a bank.
Bankers’ bank—An institution organized and chartered solely to do business with other
financial institutions, and primarily owned by the financial institutions that it services. A

Glossary 88
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bankers’ bank is a depository institution that is not required to maintain reserves under the
Board’s Regulation D (12 CFR 204). Bankers’ banks do not take deposits or make loans to the
public and are not eligible for discount window access unless they waive their exemption from
reserve requirements.
Basel Capital Accord—A 1988 agreement by the Committee on Banking Regulations and
Supervisory Practices of the Group of Ten Countries that establishes a framework for bank
capital measurement and capital standards.
Board of directors resolution—A statement of intention to follow a course of action that is
approved by a majority vote of a quorum of the board of directors of a corporation. In the context
of the PSR policy, a board of directors resolution would be adopted to convey approval to a
Reserve Bank of a net debit cap category.
Board of Governors (Board)—The Board of Governors of the Federal Reserve System.
Book-entry securities transfer—Generally, an electronic transfer of a U.S. Treasury or Government Agency security over the Fedwire Securities Service.
Cap—See Net debit cap.
Cap breach—A single-day cap breach occurs whenever the peak negative end-of-minute
balance in an institution’s Federal Reserve account on any day exceeds its single-day net debit
cap. A two-week-average cap breach occurs whenever an institution’s average peak daily
overdraft over a reserve-maintenance period is greater than its two-week-average net debit cap.
Cap category—An institution’s category or class for purposes of determining its daylight
overdraft net debit cap. There are six cap categories: zero, exempt-from-filing, de minimis,
average, above average, and high.
Cap multiple—The factor associated with each cap category for purposes of calculating the net
debit cap.
Capital measure—For depository institutions chartered in the United States, net debit caps are
multiples of “qualifying” or similar capital measures that consist of those capital instruments that
can be used to satisfy risk-based capital standards, as set forth in the capital adequacy guidelines
of the federal financial regulatory agencies. The U.S. capital equivalency measure for branches
and agencies of foreign banks is based on their strength of support assessment ranking and
financial holding company status.

Glossary 89
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Collateralized capacity – Represents the collateralized component of the maximum daylight
overdraft capacity approved by the Reserve Bank. The amount of collateralized capacity cannot
exceed the difference between the institution’s maximum daylight overdraft capacity level and
its single-day net debit cap. For example, if the single-day net debit cap increases as a result of
an increase in capital at the institution, its maximum daylight overdraft capacity is unchanged, so
its collateralized capacity is reduced.
Competitive Equality Banking Act (CEBA)—A federal law enacted August 10, 1987, that,
among other things, prohibits nonbank banks and industrial banks from incurring daylight
overdrafts in their Federal Reserve accounts on behalf of affiliates.
Daylight overdraft—A negative balance in an institution’s Federal Reserve account at any time
during the Fedwire operating day.
Peak daily overdraft—The maximum end-of-minute negative account balance held by
an institution on a particular day.
Two-week-average overdraft—The sum of the peak daily overdrafts over a two-week
reserve maintenance period divided by the number of business days in the period.
Daylight Overdraft Reporting and Pricing System (DORPS)—The computer system used by
the Federal Reserve to measure and assess fees for daylight overdrafts in Federal Reserve
accounts.
Deductible—A percent of an institution’s capital that is used to determine the amount deducted
from the gross overdraft charge for a day.
De minimis cap—The cap category that permits an institution to incur daylight overdrafts up to
a net debit cap equal to 40 percent of its capital measure.
Edge corporation—A corporate subsidiary of a domestic or foreign bank, established under
section 25(a) of the Federal Reserve Act to engage in international banking and investments.
Effective daily rate—The annual rate charged for daylight overdrafts divided by 360 days,
adjusted for the portion of the day during which the Fedwire funds transfer system is officially
operating.
End-of-minute balance—The balance in an institution’s Federal Reserve account at the end of
each minute as measured by DORPS for purposes of daylight overdraft reporting and pricing.
Exempt-from-filing cap—The cap category that permits an institution to incur daylight
overdrafts up to a cap equal to the lesser of $10 million or 20 percent of its capital measure.
Fedwire—The Federal Reserve funds and book-entry government securities transfer system.

Glossary 90
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Financial holding company (FHC) – The Gramm-Leach-Bliley Act defines a financial holding
company as a bank holding company that meets certain eligibility requirements. In order for a
bank holding company to become a financial holding company and be eligible to engage in the
activities authorized under the Gramm-Leach-Bliley Act, the Act requires that all depository
institutions controlled by the bank holding company be well capitalized and well managed (12
U.S.C. 1841(p)). With regard to a foreign bank that operates a branch or agency or owns or
controls a commercial lending company in the United States, the Act requires the Board to apply
comparable capital and management standards that give due regard to the principle of national
treatment and equality of competitive opportunity (12 U.S.C. 1843(l)).
Float-weighted posting time—The float-neutral time at which check credits are posted for
separately sorted cash letters containing checks drawn on a particular time zone or for mixed and
other Fed cash letters deposited in a particular time zone. Each float-weighted posting time is
determined by Reserve Banks based on surveys of check presentment times and apply only to
those institutions choosing the float-weighted posting time option for their check credits.
Foreign banking organization (FBO) - (1) A foreign bank, as defined in section 1(b)(7) of the
International Banking Act of 1978 (12 U.S.C. 3101(7)), that (a) operates a branch, agency, or
commercial lending company subsidiary in the United States, (b) controls a bank in the United
States; or (c) controls an Edge corporation acquired after March 5, 1987, and (2) any company of
which the foreign bank is a subsidiary.
Fractional posting times—The clock hours from 11:00 a.m. through 6:00 p.m. eastern time,
when a portion of check credits are posted for separately sorted cash letters drawn on a particular
time zone or for mixed and other Fed cash letters deposited in a particular time zone. The
percentage of check credits, by cash letter type, for each hour, is determined by Reserve Banks
based on surveys of check presentment times and applies only to those institutions choosing the
fractional posting time option for their check credits.
Government-sponsored enterprises (GSEs) - The Federal Reserve acts as fiscal agent for
government-sponsored enterprises, the securities of which are Fedwire-eligible but are not
obligations of, or fully guaranteed as to principal and interest by, the United States. The GSEs
include Fannie Mae, the Federal Home Loan Mortgage Corporation (Freddie Mac), entities of
the Federal Home Loan Bank System (FHLBS), the Farm Credit System, the Federal
Agricultural Mortgage Corporation (Farmer Mac), the Financing Corporation, and the Resolution
Funding Corporation.
Gross overdraft charge—The daylight overdraft charge calculated, based on average
overdrafts, before being reduced by the deductible valued at the effective daily rate charged for
overdrafts.
High cap—The cap category that permits an institution to incur daylight overdrafts on a single
day up to 2.25 times its capital measure and an average of its peak daily overdrafts during any
two-week reserve maintenance period up to 1.5 times its capital measure.

Glossary 91
_________________________________________________________________________
Industrial bank—An institution as defined in section 2(c)(2)(H) of the Bank Holding Company
Act. In general, an industrial bank is a state-chartered finance company that makes loans and
raises funds by selling investment certificates or investment shares to the public.
International organizations - The Federal Reserve acts as fiscal agent for certain international
organizations, the securities of which are Fedwire-eligible but are not obligations of, or fully
guaranteed as to principal and interest by, the United States. The international organizations
include the World Bank, the Inter-American Development Bank, the Asian Development Bank,
and the African Development Bank.
Limited-purpose trust company – For purposes of the PSR policy, a limited-purpose trust
company is a trust company that is a member of the Federal Reserve System but that does not
meet the definition of “depository institution” in section 19(b)(1)(A) of the Federal Reserve Act
(12 U.S.C. 461(b)(1)(A)).
Liquidity—The ability to make payments as they become due in readily available funds.
Maximum daylight overdraft capacity—An institution’s single-day net debit cap plus its
collateralized capacity. (See collateralized capacity.) Only institutions with self-assessed net
debit caps are eligible to request maximum daylight overdraft capacity from the Federal Reserve.
Net debit cap—The maximum dollar amount of uncollateralized daylight overdrafts an
institution is permitted to incur in its Federal Reserve account at any point in the day or on
average over a two-week period. The net debit cap is generally equal to an institution’s capital
measure times the cap multiple for its cap category.
Net debit position ––A negative intraday or interday balance in an account or a negative
position with an institution's counterparties in a private clearing and settlement arrangement.
Nonbank bank—In general, an institution that accepts deposits or makes commercial loans, but
does not engage in both activities. A nonbank bank is any institution that became a bank as a
result of the enactment of CEBA and was not controlled by a bank holding company on the day
before the CEBA enactment.
Overnight overdraft—A negative position in a Federal Reserve account at the Reserve Bank’s
close of business.
Posting rules—A schedule used for determining the timing of debits and credits to an
institution’s Federal Reserve account for various transactions processed by the Reserve Banks.
PSR policy—The Federal Reserve Policy on Payments System Risk.
Real-time monitoring—The ABMS function that provides the ability to monitor an institution’s
Federal Reserve account balance as transactions occur throughout the day and to reject or
intercept outgoing funds transfers when they would cause an overdraft in an institution’s Federal

Glossary 92
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Reserve account.
Reserve maintenance period—A two-week period beginning on a Thursday and ending on a
Wednesday over which most depository institutions must maintain required reserves and over
which daylight overdrafts are monitored and charges may be assessed.
Risk-based capital— Risk-based capital is the “qualifying” or similar capital measure used to
satisfy risk-based capital standards, as set forth in the capital adequacy guidelines of the federal
financial regulatory agencies. Generally, for domestic banks the relevant capital measure is
Tier I plus Tier II capital. Descriptions of capital measures, by type of institution, and related
regulatory reports can be found in appendix C.
Self-assessment—A process by which a depository institution assesses its creditworthiness,
intraday funds management, operational controls, contingency procedures, and credit policies in
order to determine its appropriate cap category for daylight overdraft purposes.
Self-assessed cap—One of three cap categories for which institutions are required to complete a
self-assessment. The self-assessment cap categories are average, above average, or high.
Systemic risk—In the context of payment systems, the risk that liquidity or payment problems at
one financial institution will be transmitted to other institutions.
U.S. capital equivalency—Capital measure applied to U.S. branches and agencies of foreign
banks for purposes of calculating net debit caps and the deductible used to calculate daylight
overdraft charges.
Zero cap—The cap category associated with a cap multiple of zero and resulting in a net
debit cap of zero. An institution may voluntarily adopt this cap category, or a Reserve Bank
may assign a zero cap to certain institutions.