DEFINITION of 'Daylight Overdraft'

A daylight overdraft occurs when a bank withdraws more money than it has in its Federal Reserve account in order to make a payment; the overdraft must be settled by the end of the business day. 

BREAKING DOWN 'Daylight Overdraft'

The Federal Reserve Banks operate Fedwire, a payment system that enables fund settlement among thousands of banks. Some of these banks are permitted to overdraw their accounts based on the understanding that incoming payments will enable them to replenish the funds by the end of the day. These overdrafts are known as intraday or daylight overdrafts.

The Fed assigns different daylight overdraft limits based on a bank's financial position. Some banks are not permitted to overdraw their accounts at all, while others can overdraw by 187.5% of their capital measures, a metric the Fed uses to analyze a bank's ability to satisfy risk-based capital standards. Banks are charged for daylight overdrafts: while they help to increase the financial system's liquidity and efficiency, they could potentially pose a systemic risk.

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