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.
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- Market responses to pricing Fedwire daylight overdrafts – papers.ssrn.com [PDF]