BROWSE

Daylight Overdraft

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."

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]
… If the expected inflow of funds is delayed for some reason, the institution may find that it has temporarily overdrawn its account, creating a daylight overdraft. Unintentional overdrafts may result from poor planning, inadequate communication, or computer problems …

Interest on reserves and daylight creditInterest on reserves and daylight credit
papers.ssrn.com [PDF]
… If the expected inflow of funds is delayed for some reason, the institution may find that it has temporarily overdrawn its account, creating a daylight overdraft. Unintentional overdrafts may result from poor planning, inadequate communication, or computer problems …

Bank behavior, interest rate determination, and monetary policy in a financial system with an intraday federal funds marketBank behavior, interest rate determination, and monetary policy in a financial system with an intraday federal funds market
www.sciencedirect.com [PDF]
… If the expected inflow of funds is delayed for some reason, the institution may find that it has temporarily overdrawn its account, creating a daylight overdraft. Unintentional overdrafts may result from poor planning, inadequate communication, or computer problems …

Comment on Intraday Bank Reserve Management: The Effects of Caps and Fees on Daylight OverdraftsComment on Intraday Bank Reserve Management: The Effects of Caps and Fees on Daylight Overdrafts
www.jstor.org [PDF]
… If the expected inflow of funds is delayed for some reason, the institution may find that it has temporarily overdrawn its account, creating a daylight overdraft. Unintentional overdrafts may result from poor planning, inadequate communication, or computer problems …

Intraday management of bank reserves: the effects of caps and fees on daylight overdraftsIntraday management of bank reserves: the effects of caps and fees on daylight overdrafts
www.jstor.org [PDF]
… If the expected inflow of funds is delayed for some reason, the institution may find that it has temporarily overdrawn its account, creating a daylight overdraft. Unintentional overdrafts may result from poor planning, inadequate communication, or computer problems …

Daylight overdrafts and payments system risksDaylight overdrafts and payments system risks
papers.ssrn.com [PDF]
… If the expected inflow of funds is delayed for some reason, the institution may find that it has temporarily overdrawn its account, creating a daylight overdraft. Unintentional overdrafts may result from poor planning, inadequate communication, or computer problems …

Market responses to pricing Fedwire daylight overdraftsMarket responses to pricing Fedwire daylight overdrafts
papers.ssrn.com [PDF]
… If the expected inflow of funds is delayed for some reason, the institution may find that it has temporarily overdrawn its account, creating a daylight overdraft. Unintentional overdrafts may result from poor planning, inadequate communication, or computer problems …



Q&A About Daylight Overdraft


What is daylight overdraft?

Daylight overdraft occurs when a clearinghouse bank issues a payment during the day that is in excess of the originator's reserve account balance.

What must be covered by the end of the business day?

Daylight overdrafts must be covered by the end of the business day.

Why do banks need to manage and reduce potential default risks?

To encourage banks to manage and reduce potential default risks, the Federal Reserve Board assesses charges for daylight overdrafts.

How does daylight overdraft occur?

The originator's reserve account balance falls below zero.

Who assesses charges for daylight overdrafts?

The Federal Reserve Board assesses charges for daylight overdrafts.