Payment System Risk (PSR) Policy
Payment and securities settlement systems are critical components of the nation's financial system. The smooth functioning of these systems is vital to the financial stability of the U.S. economy. The Federal Reserve Board has developed the PSR policy to address risks that payments and securities settlement systems present to the financial system and to the Reserve Banks.
The Reserve Banks are exposed to credit risk when they process wholesale and retail payments for financial institutions holding reserve accounts, just as financial institutions assume credit risk when offering retail payments to their customers. Part of the Federal Reserve's PSR Policy seeks to control and reduce credit risk to the Reserve Banks by controlling financial institutions' use of Federal Reserve daylight overdrafts.
A daylight overdraft occurs when there are insufficient funds in a financial institution's Federal Reserve account to cover the institution's payment activity, such as outgoing Fedwire® funds transfers or ACH credit originations, as outgoing payments are posted during the day.
To control daylight overdrafts, the PSR policy establishes limits, or net debit caps, on the amount of Reserve Bank daylight credit that a depository institution may use during a single day and over a two-week reserve maintenance period. These limits are determined jointly through assessments by the depository institution and its Reserve Bank. The limits reflect the overall financial condition and operational capacity of each institution using Reserve Bank payment services.
Financial institutions may be monitored on an ex post (i.e., end of day) or real-time basis. Under the Federal Reserve's ex post monitoring procedures, an institution with a daylight overdraft in excess of its maximum daylight overdraft capacity or net debit cap may be contacted by its Reserve Bank. The Reserve Bank may counsel the institution and discuss ways to reduce its excessive use of intraday credit. Each Reserve Bank retains the right to protect its risk exposure from individual institutions by unilaterally reducing net debit caps, imposing collateralization or clearing balance requirements, rejecting or delaying certain transactions, or, in extreme cases, taking the institution off-line or prohibiting it from using Fedwire. In addition, the Reserve Banks assess fees for daylight overdrafts above a certain deductible amount. For more details, see www.federalreserve.gov/paymentsystems/psr/relpol.htm. A Reserve Bank will monitor an institution's position in real time when the Reserve Bank believes that it faces excessive risk exposure, for example, from institutions with chronic overdrafts in excess of what the Reserve Bank determines is prudent. In addition, the Reserve Bank will reject or delay certain transactions that would exceed the institution's maximum daylight overdraft capacity or net debit caps, and take other prudential action, including requiring collateral.
Institutions that are monitored in real time must fund the total amount of their ACH credit originations in order for the transactions to be processed by the Reserve Bank, even if those transactions are processed one or two days before settlement. See the IT Handbook Wholesale Payment Systems Booklet for additional information on National Settlement Service and PSR policy.
The financial institution's board of directors is responsible for PSR policy compliance and should ensure that management establishes sound internal operating practices, including compliance with applicable banking laws, and carefully manages retail payment system-related financial risks. At a minimum, a financial institution's board of directors and senior management should:
- Understand the financial institution's practices and controls regarding the risks of processing transactions for both its own account and the accounts of its customers and respondents;
- Manage its Federal Reserve account effectively and use daylight credit prudently in accordance with the PSR policy;
- Establish prudent limits on the daylight overdraft or net debit position in its Reserve Bank reserve account and any private-sector clearing and settlement system; and
- Review periodically the institution's daylight overdraft activity to ensure the institution operates within the established guidelines.
Retail Payment Systems Risk Management