Money-center banks are shifting billions of dollars in corporate payments away from the Federal Reserve's funds-transfer system to the privately owned Chips network, according to statistics released this week.
The shift is at least partly due to a controversial Fed plan to charge for intraday credit over its Fed Wire system, according to bankers and officials at the New York Clearing House Association, which runs the Chips network for its bank owners.
In a first, Chips' volume of payments grew from the start of the year through May while Fed Wire's declined. Chips showed an 8% rise, against a 4% decline for the Fed service. Each transferred about $1 trillion daily.
The Fed plans to begin charging fees starting next April for the credit it extends informally during the day as banks wire out more funds than they have on account with the Fed.
The controversial plan, which was opposed by many bankers, is designed to reduce the Fed's exposure if a financial institution fails during the course of a business day. The Fed would have to make good on sums outstanding so that the Fed Wire system could settle at the end of the day
"We're seeing an early effect of the Fed's move toward pricing of daylight overdrafts," said John F. Lee, the outgoing president of the clearing house group.
Fear of Higher Prices
While fees are not yet being charged, bankers are evaluating how they will adjust to them. Corporate customers are concerned that the fees will be passed on to them in the form of higher prices.
By shifting payments from Fed Wire to Chips, bankers would avoid the Fed's fees for intraday credit.
A typical money center bank might pay several hundred thousand dollars in fees to cover overdrafts incurred over a two-week period, according to Fed estimates.
Over the past six months, other factors also have been at work to boost volume on Chips, clearing house officials said. In October 1992, new formats were adopted that make it possible for participants to send payments directly to and form Swift, the international bank messaging system. Some of those payments were previously sent on Fed Wire.
And foreign exchange trading volume has risen since late last year, in the light of volatile European currencies.
"Right now, the big driver [in the shift to Chips] may be the new formats," said Yawar Shah, senior vice president in charge of funds tranfer at Chemical Banking Corp. But "we expect there to be a major transfer of funds in terms of value from Fed Wire to Chips over the next two years."
Bankers and Fed officials expect the migration from Fed Wire to Chips to accelerate next year.
"When the board considered and approved the pricing of daylight overdrafts, it was aware of the potential to affect the movement between the two systems," said John Parrish, assistant director with responsibility for the Fed Wire program, Federal Reserve Board of Governors.
"Frankly, we all expect there will be an effect in the marketplace as participants work out ways to deal with [overdraft pricing]," Mr. Parrish said. The Fed says that as much as 30% of the dollar volume currently transferred on Fed Wire may move to Chips.
Chips, the Clearing House Interbank Payments System, is used primarily for foreign exchange, Eurodollar, and other international payments.
However, Mr. Shah said, money center bankers are now evaluating their payments to determine whether other types of domestic payments, trade payments, and money market transfers, could be shifted from Fed Wire to Chips.
Bankers need to shift volume in an orderly way, Mr. Shah said, so they can see what the impact will be on other participants.
The shift "has to be multilateral," said Mr. Shah, who is chairman of the New York Clearing House Association's funds-transfer committee.
Fed Wire is better suited than Chips for some kinds of payments that are very time-sensitive, Mr. Shah said.