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

Interest 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 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 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 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 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 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