Definition
In the United States, the daylight overdraft is a system in which “allows qualifying banks to overdraw on their Federal Reserve accounts in order to make payments via Fedwire. Banks can acquire overdrafts throughout the day to make payments, but must ensure that their accounts are not in a negative position at the end of the day.”
Daylight Overdraft
What is ‘Daylight Overdraft’
Occurs when a clearinghouse bank issues a payment during the day that is in excess of the originator’s reserve account balance. Daylight overdrafts must be covered by the end of the business day.
Explaining ‘Daylight Overdraft’
In order to encourage banks to manage and reduce potential default risks, the Federal Reserve Board assesses a charge for daylight overdrafts.
Further Reading
- Settlement Liquidity and Monetary Policy Implementation—Lessons from the Financial Crisis – papers.ssrn.com [PDF]
- Interest on reserves and daylight credit – papers.ssrn.com [PDF]
- Bank behavior, interest rate determination, and monetary policy in a financial system with an intraday federal funds market – www.sciencedirect.com [PDF]
- Comment on Intraday Bank Reserve Management: The Effects of Caps and Fees on Daylight Overdrafts – www.jstor.org [PDF]
- Intraday management of bank reserves: the effects of caps and fees on daylight overdrafts – www.jstor.org [PDF]
- Daylight overdrafts and payments system risks – papers.ssrn.com [PDF]
- Market responses to pricing Fedwire daylight overdrafts – papers.ssrn.com [PDF]
