The General Accounting Office, in an assessment of payment risks, has identified five steps the Federal Reserve Board could take to safeguard electronic transaction networks.
The options are: banning automated clearing house payments of more than $100,000; requiring same-day settlement of those items; creating a clearing house for foreign exchange deals; raising prices for daylight overdrafts; and adopting immediate settlement for foreign exchange transactions.
GAO, an investigative arm of Congress, did not advocate specific policies in the report. It was sent June 20 to House Banking Committee Chairman Jim Leach and was released to the public Wednesday.
The report coincides with the Fed's own study of its role in the retail payment system. The review, headed by Fed Vice Chairman Alice M. Rivlin, is expected to be completed by fall. Ms. Rivlin declined to comment on the GAO report, saying she had not seen the final version.
Industry officials questioned the need for additional safety measures.
"This is a moot point," said Harold G. Deal, vice president of transaction services strategic planning at NationsBanc Services Co. "We can put these processes in place, but what are we trying to protect against? The risk of a default is relatively small."
"I don't agree with GAO," said Richard C. Ercole, president of Huntington Treasury Management Co. "This is a fairly secure system as it is now."
William B. Nelson, executive vice president at the National Automated Clearing House Association, said the government should look at risk-based capital requirements. "That really would address the risk issue," he said. "These artificial transaction limits show a lack of understanding of where the risk is."
On the retail side, GAO said banks routinely avoid the $100 million limit on automated clearing house entries by splitting larger payments into pieces. An ACH transaction costs about a penny compared with 45 cents on Fed Wire, the central bank's highly secure system designed for megadollar amounts.
If a bank using the ACH for large payments fails, systemic problems could result because there is no one guaranteeing that its transaction will clear, GAO said. The Fed could limit this risk if the ACH payment limit were cut to $100,000, it said.
GAO also said the Fed could reduce the risk that a payment will not clear if it adopts same-day settlement for ACH transactions. The payments are now final the next day.
On the wholesale payment side, GAO said the Fed could encourage banks to create a clearing house to guarantee foreign exchange transactions.
GAO also questioned whether the Fed was charging enough for daylight overdrafts, noting that the current rate is less than the Fed funds rate. It also said the central bank could eliminate uncollateralized daylight overdrafts altogether, just as several European central banks have done.
GAO praised the Fed's decision to keep Fed Wire open from 12:30 a.m. to 6:30 p.m., saying it will permit banks to settle foreign exchange transactions simultaneously, which means neither party has to worry about the other defaulting.
In a letter included in the report, Clyde H. Farnsworth Jr., the Fed's director of reserve bank operations and payment systems, said GAO's analysis "does not provide a balanced discussion" and "contains a number of incorrect and misleading statements."
For instance, he said banning large ACH payments would be pointless because banks would switch to checks, which carry the same risks as large ACH transactions.
Mr. Farnsworth also said trying to settle all ACH transactions in a single day would increase the risk that some payments would not be posted on time and thereby disrupt the payment system.
He said there is no reason to raise the cost of daylight overdrafts, saying the cost of daytime credit should be less than the cost of overnight loans.
GAO also questioned whether the Fed should continue to provide retail payment services. The same issue has been debated by bankers and other users of Fed services in 52 closed-door hearings held by the central bank over the last two months.
Michael E. Grove, president of First National Bank of White Sulphur Spring, Mont., said he urged the Fed at a meeting in Helena, Mont., to offer new electronic payment services. "We don't want the Fed to do anything less than they are doing now," he said. "We want them to be more aggressive and get more involved in electronic payments."
"The Fed needs to keep control over the payment system," Alice M. Dittman, chairman of Cornhusker Bank, Lincoln, Neb., said she told the Fed at an Omaha meeting. "They need to move ahead and continue the technology advance."
But indicating the tension between such community bankers and his big- bank membership, Anthony T. Cluff, executive director of Bankers Roundtable, said he told the Fed it "ought to allow the private sector to do as much of the retail payment clearance as possible. The Fed's role ought to be minimized."
Ms. Rivlin said her panel has not reached any conclusions. "We are really still assessing what we have learned," she said. "We expect to be doing that throughout the summer."
