Payment System Risk Policy

The Federal Reserve Board of Governors developed the Payment System Risk (PSR) policy to address the risks that payment systems present to the Federal Reserve Banks, the banking system, and 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. Due to special risks, institutions that do not have regular access to the discount window, such as agreement corporations and banker’s banks, should not incur daylight or overnight overdrafts in the Federal Reserve accounts.

The PSR policy established limits on the amount of daylight credit that may be used by an institution during a single day. These limits are sufficiently flexible to reflect the overall financial condition and operational capacity of each institution using Federal Reserve payment services. The policy also protects Reserve Banks from the risk of loss by requiring collateral to cover daylight overdrafts in certain circumstances or by restricting the use of Federal Reserve payment services by institutions that incur frequently excessive overdrafts. Collateral may also be used to offset pricing.

If depository institutions are unable to fund their daylight overdraft position in their Federal Reserve accounts before the end of the day, Reserve Banks face heightened credit risk. The Federal Reserve guarantees payment for Fedwire funds and book-entry securities transfers, Net Settlement Service (NSS) entries, and ACH credit originations made by account holders. If an institution were to fail after sending a funds transfer that left its account in an overdraft position, the Federal Reserve would be obligated to cover the payment and bear any resulting losses.