Net Debit Cap

Under the Federal Reserve’s PSR program, each depository institution that maintains a Federal Reserve account is assigned or may establish a net debit cap. A net debit cap is the maximum dollar amount of uncollateralized daylight overdrafts that an institution is authorized to incur in its Federal Reserve account.

An institution must be financially healthy and have regular access to the discount window to adopt a positive net debit cap. This section discusses the types of cap categories and the methods for establishing a cap category. The dollar amount of the net debit cap is determined by an institution's cap category, or class, and its reported capital.

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, is normally fixed for one year. The policy defines six cap categories, described in detail below: high, above average, average, which are also known as self-assessed caps, and de minimis, exempt from filing, and zero.

Cap categories and their associated cap levels, set as multiples of capital, are listed in the following table. Note the net debit cap under the exempt-from-filing category is the lesser of 20% of the risk-based capital or $10 million.

Cap Multiple Matrix

Cap Categories Cap Multiples
  Single Day Two-week Average
Zero 0 0
Exempt-from-Filing $10 million/0.20 $10 million/0.20
De Minimis 0.40 0.40
Average 1.25 0.75
Above Average 1.875 1.125
High 2.25 1.50

Self-Assessed Caps

Financially healthy depository institutions that regularly incur daylight overdrafts in excess of 40 percent of their capital must perform an assessment of their credit worthiness, intraday funds management and control, customer credit policies and controls, and operating controls and contingency procedures to obtain a cap level that accommodates their normal use of intraday credit. The institution’s board of directors must review and approve the results of the self-assessment, and the institution must communicate its director's approval to the Reserve Bank by submitting a board-of-directors resolution.

The Reserve Bank, in conjunction with the institution's primary regulator, will review the cap resolution for appropriateness. Should the Reserve Bank determine that the cap resolution is not appropriate, the institution will be informed that it should reevaluate its self-assessment and submit another resolution. Additional information on the self-assessment process is provided in chapter VI in the Guide to the Federal Reserve's Payments System Risk Policy.

De Minimis Caps

Depository institutions that incur daylight overdrafts up to 40 percent of their capital 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 up to 40 percent of its capital if the institution submits a board-of-directors resolution. An institution with a de minimis cap must submit a copy of its board-of-directors resolution (or a resolution by its holding company's board) approving the depository institution's use of daylight credit up to the de minimis level to its Reserve Bank at least once each year.

If an institution with a de minimis cap exceeds its cap during a two-week reserve maintenance period, its Reserve Bank will counsel the institution and decide whether the de minimis cap should be maintained or whether the institution will be required to perform a self-assessment for a higher cap.

Exempt-from-Filing Caps

The majority of depository institutions that hold Federal Reserve accounts have an exempt-from-filing net debit cap. The exempt-from-filing cap category is granted at the discretion of the Reserve Bank and permits institutions to incur daylight overdrafts in amounts up to the smaller of $10 million or 20 percent of their capital.

If a Reserve Bank determines that an institution is eligible for the exempt-from-filing status, it will assign this cap category without requiring any additional documentation. The Reserve Bank will review the status of an exempt depository institution that incurs overdrafts in its Federal Reserve account in excess of its limit on more than two days in any consecutive two-week reserve maintenance periods. The Reserve Bank will decide if the exemption should be maintained or if the institution will be required to file for a higher cap.

Zero

An institution with a zero net debit cap should not incur daylight overdrafts in its Federal Reserve account. If an institution with a zero cap incurs a daylight overdraft, the Reserve Bank will counsel the institution and may monitor the institution's activity in real time and reject or delay certain transactions that would cause an overdraft. If the institution qualifies for a positive cap, the Reserve Bank may suggest that the institution adopt an exempt-from-filing cap or file for a higher cap if the institution believes that it will continue to incur daylight overdrafts.

In certain instances, a Reserve Bank may assign a depository institution a zero net debit cap. Institutions that may pose special risks to the Reserve Banks, such as those without regular access to the discount window, those incurring daylight overdrafts in violation of the PSR policy, or those in weak financial condition, are generally assigned a zero cap. The Reserve Banks may also assign recently chartered institutions a zero cap.