In anticipation of new daylight overdraft regulations, the credit union industry's largest bankers' bank will stop transferring up to $22 billion in securities through the Federal Reserve Bank of Kansas City.
In October, Overland Park, Kan.-based U.S. Central Credit Union will move its securities, which have a par value of between $20 billion and $22 billion, to an undisclosed custodian charged with shifting them to and from U.S. Central.
U.S. Central is the Kansas City Fed's second-largest securities transfer customer, moving between $700 million and $1.3 billion in securities a day through the Fed.
Revenue Loss Called |Minor'
Barry Robinson, a Kansas City Fed spokesman, said the facility would suffer some "minor" revenue loss, and the effect on the Federal Reserve System would be "zilch."
Last year the Kansas City Fed made $48.3 million in fees from securities transfer services. Mr. Robinson did not say how much came from U.S. Central.
"It's a minor portion of a smaller revenue [for the Fed] service," said Mr. Robinson.
Under U.S. Central's new relationship, the custodian's reserves would absorb any overdrafts stemming from unexpectedly large securities purchases by U.S. Central's affiliates.
Would Be Subject to Penalties
If U.S. Central were to keep the securities in the Fed, in which it holds no reserves, it would have no cushion against overdrafts and would have to pay penalty fees.
"We wouldn't have undertaken this initiative absent the daylight-overdraft issue," said U.S. Central president James R. Bell, who stressed that he has been happy with the Fed's service. In a move toward consolidation, U.S. Central also is placing between $15 billion and $17 billion of securities currently under another private-sector custodian with the new one.
Working through 42 corporate credit unions, U.S. Central acts as a custodian for about $28 billion in securities held by other credit unions. U.S. Central and the other corporate credit unions also hold about $9 billion in securities on their own.
3 Years in the Making
Roughly 24,000 securities, chiefly government and agency securities, are in U.S. Central's safekeeping.
U.S. Central made the decision three weeks ago. It had been discussing what to do since 1990, when the Fed announced it would be changing its daylight overdraft policy.
U.S. Central and the Kansas City Fed will will maintain their wire funds transfer relationship, Mr. Robinson said.
Beginning April 14, 1994, the Fed will impose a penalty on daylight overdrafts by banker's banks that do not hold reserves. Under a proposal currently out for comment, banker's banks would pay a higher penalty fee than regular banks and not be eligible for a cap.
Avoiding Overnight Overdrafts
The Fed's announced goal is to eliminate the threat of overdrafts that would cause it to extend credit overnight.
Although the Fed has not yet determined a penalty rate, it has decided such fees will be levied.
"We have been growing our business lately, and we would not be able to do so" under the Fed's overdraft policy, Mr. Bell said.
U.S. Central has not incurred overnight overdrafts, he added. Mr. Bell also said determining how many daylight overdrafts U.S. Central has made in the past would be impossible.
U.S. Central is acutely sensitive to daylight overdrafts. Security purchases made by corporate credit unions for delivery to U.S. Central hit its transaction account at the Fed. Because U.S. Central can't predict when those debits will appear, it has no way of ensuring enough money will be available to cover the purchases - short of overfunding its transaction account. Because U.S. Central does not hold reserves it would incur an overdraft.
U.S. Central would be particularly vulnerable to overdrafts early in the morning, when it is still awaiting the return of funds invested in overnight money markets.
Under U.S. Central's new relationship, the custodian's reserves would absorb any overdrafts without any extra charge to U.S. Central.