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As already mentioned, in real-time gross settlement systems, each participant must have a certain amount of liquidity to make payments smoothly. During a trading day, various participants may experience a temporary shortage of free funds (the so-called daylight overdraft). If there is no money in the account, the system cannot transfer funds and must either cancel the payment order or return it to the sender.
To ensure the continuity of payments, the central banks of most countries provide overdraft overdraft loans to participants, which are called "day" or "intraday" loans (interday credits). This loan must be repaid by the end of the trading day.
One of the possible options for the formation of an intraday overdraft is shown in Fig. 5.3, which shows a graph of changes in the balance of funds in the reserve account of a large commercial bank with the Federal Reserve Bank of New York. The balance on this account at the end of the working day must be positive and meet the minimum required reserves ratio set by the Fed.
In the morning, the bank repays the loans it received the day before, and also performs urgent payment transactions. His outgoing transfers exceed receipts, and by mid-day the account has a debit balance. This is an intraday overdraft. Despite the lack of funds in the account, the Federal Reserve Bank continues to fulfill payment orders, providing a loan to a commercial bank to cover the cash gap. In the afternoon, the situation changes: due to the receipt of counter payments and loans that the bank takes on the money market, it manages to eliminate the deficit in the reserve account. The intraday overdraft is repaid, and a positive balance of a commercial bank is formed [Cornett, Saunders, 1999, p. 5961.
Central bank overdraft loans are usually provided in two forms:
When issuing an overdraft overdraft loan, the central bank acts as a guarantor, ensuring the finality of current payments and assuming the risk of losses that could arise if the sending bank is unable to repay its debt.
The scale of possible losses is evidenced by the following episode from US banking history. On November 20, 1985, an accident occurred in the computer system of Bank of New York, one of the largest clearing agents in the US Treasury market. As a result, the bank was unable to complete settlements for day deals in government bonds and by the end of the day, its reserve account had a debit balance that was many times greater than the size of its equity capital. The Federal Reserve Bank of New York was forced to provide the Bank of New York with a one-day loan in the amount of $ 23.4 billion to prevent the bank from going bankrupt.
After the incident with the blocking of settlements by the Bank of New York, the Fed took a number of measures to reduce the amount of the daily overdraft. To this end, two approaches were used, which differed from measures to minimize calculated risks in European countries. First, the practice of setting borrowing limits for settlement participants (the so-called net debit caps) was introduced, which determined the maximum allowable amount of debt on overdrafts during the day. Secondly, a commission was introduced for the use of overdraft, which initially (in 1993) was 0.1% per annum on the amount of the daily overdraft. Subsequently, this commission was repeatedly raised.
To ensure the continuity of payments, the central banks of most countries provide overdraft overdraft loans to participants, which are called "day" or "intraday" loans (interday credits). This loan must be repaid by the end of the trading day.
One of the possible options for the formation of an intraday overdraft is shown in Fig. 5.3, which shows a graph of changes in the balance of funds in the reserve account of a large commercial bank with the Federal Reserve Bank of New York. The balance on this account at the end of the working day must be positive and meet the minimum required reserves ratio set by the Fed.
In the morning, the bank repays the loans it received the day before, and also performs urgent payment transactions. His outgoing transfers exceed receipts, and by mid-day the account has a debit balance. This is an intraday overdraft. Despite the lack of funds in the account, the Federal Reserve Bank continues to fulfill payment orders, providing a loan to a commercial bank to cover the cash gap. In the afternoon, the situation changes: due to the receipt of counter payments and loans that the bank takes on the money market, it manages to eliminate the deficit in the reserve account. The intraday overdraft is repaid, and a positive balance of a commercial bank is formed [Cornett, Saunders, 1999, p. 5961.
Central bank overdraft loans are usually provided in two forms:
- 1. REPO (repurchase agreement), that is, an agreement on the purchase by a central bank from a participating bank of securities with repurchase at a later date at a specially agreed price.
- 2. Overdraft - an agreement on the admissibility of the formation of a debit balance on the participant's current account with the central bank, repaid by means of a loan subject to compensation by the end of the day. If the overdraft agreement provides for the collateral in the form of securities, then this form is similar to the REPO.
When issuing an overdraft overdraft loan, the central bank acts as a guarantor, ensuring the finality of current payments and assuming the risk of losses that could arise if the sending bank is unable to repay its debt.
The scale of possible losses is evidenced by the following episode from US banking history. On November 20, 1985, an accident occurred in the computer system of Bank of New York, one of the largest clearing agents in the US Treasury market. As a result, the bank was unable to complete settlements for day deals in government bonds and by the end of the day, its reserve account had a debit balance that was many times greater than the size of its equity capital. The Federal Reserve Bank of New York was forced to provide the Bank of New York with a one-day loan in the amount of $ 23.4 billion to prevent the bank from going bankrupt.
After the incident with the blocking of settlements by the Bank of New York, the Fed took a number of measures to reduce the amount of the daily overdraft. To this end, two approaches were used, which differed from measures to minimize calculated risks in European countries. First, the practice of setting borrowing limits for settlement participants (the so-called net debit caps) was introduced, which determined the maximum allowable amount of debt on overdrafts during the day. Secondly, a commission was introduced for the use of overdraft, which initially (in 1993) was 0.1% per annum on the amount of the daily overdraft. Subsequently, this commission was repeatedly raised.
