Customer Daylight Overdrafts
Financial institutions often permit their individual and corporate customers to incur intraday overdrafts by allowing customers to make payments without available balances. In most cases, overdrafts are eliminated with incoming funds transfers from other institutions (or outgoing securities transfers against payment) by the end of the business day.
Financial institutions engaging in this practice are extending credit to their customers. As such, they should monitor the credit position of individual customers; control the amount of intraday credit extended to each customer; and have guidelines to prevent exceeding approved intraday and overnight overdraft limits. These guidelines should include:
- Reviewing customer credit limits and the frequency and scope of internal credit reviews. In the absence of pre-authorized limits, institutions should have a process for management approval of daylight overdrafts. Authorization should be within the lending authority of approving officers.
- Reporting and approval procedures for payments exceeding established credit limits to ensure officers with sufficient lending authority make approvals.
- Reviewing intraday overdrafts incurred for compliance with established limits as well as approval and reporting requirements.
- Reviewing arrangements/agreements regarding collateralization of credit exposures.
To the extent that these guidelines give consideration to projected incoming payments, the financial institution should be aware of the risk that expected payments may not be received when expected. Moreover, as described below, institutions should also consider whether such payments have been or are expected to be made with finality.
Since daylight overdrafts constitute an extension of credit (no matter the period of time involved), financial institutions' credit policies should include provisions for approving and monitoring intraday credit lines to customers. Daylight overdrafts have the potential to become overnight overdrafts or overnight loans, and institutions should also have procedures to determine limits on overnight overdrafts. Both sets of procedures should be similar to loan portfolio credit analysis. Credit policies and procedures should include:
- Analyzing worthiness of all borrowers with amounts outstanding in excess of the credit line.
- Reviewing reporting and approval procedures for overdrafts and settlement credits exceeding established limits.
- Assessing reporting and approval procedures for payments against uncollected funds.
Depending on the creditworthiness of the customer and the nature of the activity, a financial institution should consider requiring customers to advise the institution of anticipated incoming securities transfers. Financial institutions should also consider requiring the customer to pre-fund all such anticipated transfers, with the understanding that any transfers not pre-funded may be reversed. To further mitigate credit risk, management should consider requiring customers to collateralize intraday overdrafts. As mentioned above, the control of customers' daylight overdrafts is one of several elements of the Self-Assessment process set out in the Board's PSR policy (see Appendix E).