Financial Update - Volume 19, Number 3 - Fed Reduces Exposure to Daylight Credit

Financial Update
Vol. 19, No. 3,
Third Quarter 2006


FEATURES

Guynn Retiring
on Oct. 1

Booklet Imparts
Katrina's Lessons

Fed Holds Hearings on
Mortgage Practices

Atlanta Fed Conference
Spotlights Hedge Funds

New Brochure Touts
Bank Account Benefits

Birmingham Branch to
Convert to Cash Depot

Fed Reduces Exposure
to Daylight Credit

Fed Chair Speaks on
Energy Costs' Effects

Schools Gather to Discuss
Community Development

Bills Seek Tougher
Data Security

Fed Gov. Bies Addresses
Mortgage Markets

Olson Resigns Fed to
Lead Pension Board

DEPARTMENTS

Data Bank

Circular Letters

Staff

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Reserve Banks Limit Daylight Credit Exposure

The policy governing depository institutions' use of Federal Reserve intraday credit—commonly referred to as daylight credit—changed on July 20.

Under the revised policy, Reserve Banks will process and post interest and redemption payments on securities issued by government-sponsored enterprises (GSEs) only if the GSEs' accounts with the Fed contain sufficient funds to cover the obligation. This policy revision also applies to some international organizations.

The new policy allows principal and interest payments from GSEs and international organizations to flow in installments over the course of the business day rather than as a single morning payment.

Move limits credit risk
Previously, Reserve Banks processed and posted these securities' payments each morning even if the issuing GSE or organization had not fully funded the obligation.

The Fed's move is designed to eliminate the daylight credit exposure that came from processing these payments prior to such payments' being fully funded by the issuer.

Change may affect payment flows
Reserve Banks act as fiscal agents for some GSEs and international organizations including Fannie Mae, the Federal Home Loan Mortgage Corp., entities of the Federal Home Loan Bank system, the World Bank, the Inter-American Development Bank, the Asian Development Bank, and the African Development Bank. More than 1,500 depository institutions receive principal and interest payments from these organizations each month.

Related
Press release
Payments System Risk data

The new policy allows principal and interest payments from GSEs and international organizations to flow in installments over the course of the business day rather than as a single morning payment. Such restructured payments flows to financial institutions may cause customer accounts to be credited later in the day, but overall funding management can help absorb the impact.

This article was written by Al Jolly, director of credit and risk management at the Atlanta Fed.