WASHINGTON - After years of debate, the Federal Reserve Board on Wednesday formally decided to start charging fees when banks overdraw their Fed accounts during the business day.
The board also adopted a sweeping change in the way banks account for check clearings.
The actions, which were expected but largely opposed by the industry, are. the latest in a series of steps by the Fed to reduce the risk it incurs as the primary operator of the nation's payment system.
The changes are designed to force banks to reduce so-called daylight overdrafts.
Such overdrafts, which can last from a few minutes to a few hours, now occur frequently at large banks that send and receive hundreds of millions of dollars a day over the Fed's funds-transfer network.
Despite previous efforts to curb the practice, intraday overdrafts have continued to grow and now total some $180 billion at the peak of a typical business day.
More than 6,000 institutions incur daylight overdrafts at least once a month, but the vast majority of the deficits are small and will be exempt from the rule.
Fewer than 300 banks are expected to pay fees, and fewer than 30 will pay more than $120,000 annually. But some large banks face annual charges exceeding $1 million.
The check-posting rules. which take effect Oct. 14, 1993 will have a broader impact. "All depository institutions are going to have to make changes," said Fed Governor Edward W. Kelley.
The Fed will start phasing in the overdraft fees on April 14, 1994. Banks will be charged based on the size of their average daily overdraft. Initially banks will pay at an annual rate of 10 basis points. That will rise to 20 basis points in April 1995 and 25 basis points one year later.
The check-posting rules will work against a bank on days when it pays out more in checks than it receives.
Currently banks that have net credit positions for nonwire transactions can post the credit at the opening of business, but net-debit positions do not have to be posted until after the close of business. This allows some $30 billion in check and other payments on average not to hit Fed accounts until the end of the business day.
The new rules seek to account for such payments sooner. Debits for check presentments will have to be posted one hour after presentment, beginning at 11 a.m. Eastern time.
Banks will be able to choose between two options for crediting their accounts for checks:
* Checks could be posted hourly, starting at 11 a.m. Eastern time, based on unique sets of fractions for each of the four U.S. time zones.
* Or institutions could receive credits at one float-weighted time for each time zone, receiving credits up to six times a day.
Resignation to Pricing
The initial reaction to the complicated changes was one of resignation.
"The industry is not terribly in favor of pricing," said Phyllis Meyerson, senior consultant with J.D. Carreker and Associates Inc., in Dallas. "But they will have to accept it because they have no choice."
Some bankers said the Fed is exaggerating the problem and unfairly penalizing all banks for the sins of the few that create the bulk of the risk.
"It's like using an atom bomb to kill a mosquito," complained one senior banker with a major institution in the Northeast.
Grease in the Payment System
The banker added that institutions will be hard-pressed to pass the overdraft fees on to their customers because it is difficult to figure out which transaction causes an overdraft.
Daylight overdrafts typically occur when an institution wires out more funds than are in its reserve account. At the biggest banks, overdrafts have amounted to more than $1 billion.
The overdrafts, which are usually covered by the close of business as incoming payments arrive, act as grease in the payment system. They provide great flexibility to transaction-processing operations because banks do not have to match incoming and outgoing payments.
Cost-Cutting Moves Expected
But there is concern that the sudden failure of a bank with a large overdraft position could threaten other banks expecting to receive payments from it and could leave the Fed exposed to huge losses.
The Fed previously has required banks to cap their aggregate levels of overdrafts and the size of deficit they could incur with any individual institution. Now the Fed is seeking to discourage overdrafts by charging for them.
The fees also reflect the fact that overdrafts have amounted to interest-free loans from the Fed to the overdrafting bank. "Not only are the reserve banks exposed to risk of loss, but they are also providing significant subsidy," said Governor Wayne D. Angell on Wednesday.
When fully phased in, the new fees would cost the industry $60 million a year, Fed officials said, assuming the banks made no changes in their operating procedures. But they expect the new system to cause many banks to cut their overdrafts.
Such changes include delaying payments that are not time-sensitive, requiring customers to submit large checks earlier in the day, and shifting some payments to the privately operated CHIPS wire-transfer system.
Fed governors stressed that some tinkering of the regulations is likely down the road.
"Because this is a developing area, we're probably going to be back at the table here making some adjustments in the future," Susan M. Phillips said.