Magazine article American Banker

Fed Unveils Data on Overdraft Caps

Magazine article American Banker

Fed Unveils Data on Overdraft Caps

Article excerpt

During two weeks in December, about 5,000 financial institutions overdrew their accounts with the Federal Reserve Systen at least once. In some cases, the intraday overdrafts amounted to billions of dollars. Overall, they totaled more than $100 billion daily.

Starting March 27, the Fed is going to crack down on such "daylight overdrafts" by making institutions specify a limit, or cap, on the amount they can go into the red during the day while transferring funds. The limit is determined by a self-evaluation of creditworthiness, credit policies, and operating controls.

Last week, the Fed released preliminary data on how banks were rating themselves. Among the commercial banks, about 11% indicated they would file for the maximum overdraft cap permitted. The second-highest category -- "above average" cap -- was selected by 30%; the "average cap" by 39%; and "no cap" -- which means no overdrafts can be incurred -- by 20%.

The aggregated data, based on preliminary ratings submitted by 2,210 financial institutions, seemed to fall within the Fed's expectations. The agency had hinted that if more than 10 to 15% of banks in each peer group sought the highest cap, it would be a signal that the banking industry was not taking the voluntary risk-reduction effort seriously. The implied threat has been that if banks could not police themselves, the Fed would step in and impose overdraft limits.

But statistics on individual peer groups were not released. Of particular interest is what percentage of the largest banks -- which dominate the wire-transfer business and run the biggest overdrafts -- are seeking the highest cap. …

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