Fed proposes changes to PSR policy

Federal Reserve Board proposes changes to its Payments System Risk (PSR) policy

WASHINGTON – The Federal Reserve Board has requested public comment on proposed changes to its Payments System Risk (PSR) policy that are intended to loosen intra-day liquidity constraints and reduce operational risks in financial markets and the payments system. If passed, a revised PSR policy could be implemented two years from the adoption of a final rule, according to the Fed.

The proposals include adopting a policy of supplying intra-day balances to healthy depository institutions predominantly through explicitly collateralised daylight overdrafts. To avoid significantly disrupting the operation of the payments system and increasing the cost burden on a large number of institutions that incur small amounts of daylight overdrafts, the Fed would allow depository institutions to pledge collateral voluntarily to secure daylight overdrafts. The proposed policy would encourage the voluntary pledging of collateral to cover daylight overdrafts by providing collateralised daylight overdrafts at a zero fee and by raising the fee for uncollateralised daylight overdrafts to 50 basis points (annual rate) from the current 36bp.

The proposed policy would also involve changes to other policy provisions, including adjusting net debit caps, streamlining procedures for the expansion of daylight overdraft capacity for certain foreign banking organisations, eliminating the current deductible for daylight overdraft fees, and increasing the penalty daylight overdraft fee for ineligible institutions to 150bp (annual rate) from the current 136bp.

Comments are requested by June 4, 2008.