Financial Update - Volume 19, Number 3 - Fed Reduces Exposure to Daylight Credit
Vol. 19, No. 3,
Third Quarter 2006
Fed Reduces 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.
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.