Federal Reserve Intraday Liquidity

1
Federal ReserveIntraday Liquidity

• ACCU 12th Annual Meeting
• October 15, 2007

2
Several streams converging

• Corporates facing early morning funding pressure
• Corporates facing pressure from Reserve Banks on
  daylight overdrafts
• Corporates desiring greater assurance that
  U.S. Central can provide needed liquidity
• Fed seeking comment on consultation paper

3
Early morning funding pressure

• ACH Credits posted at 830 am EST
• ACH Debits posted at 1100 am EST
• Credit unions funding imbalance
• few credits, but many debits
• worsening with ACH growth
• Monthly funding equilibrium rare
• the 3rd, 15th, and 30th

4
Daylight overdraft pressure

• Several corporate recently have incurred brief
  overdrafts in their Fed accounts
• These corporates saw pressure and undesired
  attention from both the Fed and the NCUA

5
Fed consultation paper

• The Fed is
• seeing increasing demand for Fed intraday credit
• seeing increasing late-in-the-day payments,
  resulting in large daylight overdrafts at
  receivers
• concerned about credit risk to the Fed, and even
  more about operational risk and
• looking to reduce risk and improve efficiency.

6
Corporate Network response

• Did not respond to consultation paper
• Studied causes and effects
• Developed argument to Fed

7
Proposed pilot program

• Fed would provide limited access
• daylight overdrafts only
• no discount window access
• Borrowings would be fully collateralized
• Legal defeasance structure would prevent
  overnight overdrafts
• Fed prefers to pilot with one corporate
  (U.S. Central) initially to gain experience
  before potentially extending to a broader group

8
Trial balloon with the KC Fed

• Generally receptive
• timing is good
• Need to explain
• difference from other bankers banks
• why cash management strategies unavailable

9
Posting sterile reserves

• As an alternative to defeasance, reduce
  transaction account balances, with either
• sweep accounts
• requires extensive and costly systems re-design
• Fed funds purchases
• currently researching legal, regulatory,
  accounting, and practical impediments
• If successful, may voluntarily post reserves
• access to discount window AND
• ability to incur daylight overdrafts
• Could result in U.S. Central being able to
  provide additional intraday liquidity to member
  corporates

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This will not happen overnight!