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August 24, 2021

Better Markets Urges the Fed to Rethink Payment Systems Proposal that Dangerously Expands Fed Lending Access to Undercapitalized and Poorly Run Banks

Better Markets issued a comment letter to the Federal Reserve Board highlighting the risks that would be created by the proposed changes to their Payment System Risk (PSR) policy.  The most dangerous of these changes would be effectively allowing banks with poor supervisory ratings and/or undercapitalized banks to have access to collateralized overdrafts.

Better Markets urged the Fed to rethink its proposed modifications to its Payment Systems Risk (PSR) policy that would dangerously expand the availability of intraday credit through the Reserve Banks to undercapitalized and poorly run banks.

Why it matters. The Fed facilitates large payments between banks through accounts held by banks with the Fed. Through its PSR policy, the Fed provides intraday credit to banks that are in overdraft status with their Fed accounts (“daylight overdrafts”), which is most often due to a difference in timing between debits and credits. Because these daylight overdrafts are extensions of credit by the Fed to banks, they are a source of credit risk to the Fed if a bank is unable to pay off the overdraft in a timely manner. Therefore, historically the Fed generally excluded banks that were undercapitalized or had a poor supervisory record from participating in the daylight overdraft program, but the proposal seeks to expand the program to such banks.

What we said. “While encouraging collateralization of daylight overdrafts is an important risk management effort, the proposal seeks to do so without sufficient consideration of the risks created by the proposed changes . . .”

Bottom line. We feel strongly that the misguided proposed changes to the PSR policy will make the system less safe, and that the Board failed to provide the necessary compelling justification for these changes.

Read our comment letter here.

Comment Letters
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