What is Daylight Overdraft?
A daylight overdraft occurs when a bank transfers out more in a day than it has in its reserves.
How Does Daylight Overdraft Work?
Let's say Bank XYZ has assets of $100 million. The Federal Reserve requires the bank to maintain 10% of this in reserves, or $10 million. If, one day, the bank transfers $12 million out of various accounts, it creates a $2 million daylight overdraft. The overdraft is a "daylight overdraft" because Bank XYZ covers the $2 million shortage by the end of the day by borrowing from the Federal Reserve. The Federal Reserve charges a fee for daylight overdrafts.
Why Does Daylight Overdraft Matter?
Daylight overdrafts can create financial risk because they can destabilize the banking system if enough banks do it. Accordingly, the Federal Reserve charges fees to discourage daylight overdrafts. Additionally, if a bank incurs frequent daylight overdrafts, the Federal Reserveoften institute additional oversight.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
You probably remember the Beatles' famous lament “will you still need me, will you still feed me when I'm 64?" But the kind of anxiety many people experience about aging should extend...Read More →
Winning stock pickers share a few common strategies. We all like to scrutinize companies'...Read More →