The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
The Outreach and Education function engages, empowers and educates the Second District communities that the Bank serves, especially civic leaders, students, educators, small business owners, policymakers and the general public. It furthers the Bank's commitment to the region by listening to the communities we serve and leveraging our unique attributes to positively impact school and university programs, as well as analysis and research.
A fundamental concern for any lender is credit risk—the risk that a borrower will fail to fully repay a loan as expected. Thus, lenders want credit arrangements that are designed to compensate them for—and help them effectively manage—this type of risk. In certain situations, central banks engage in credit arrangements as lenders to banks, so they must manage their exposure to credit risk. This article discusses how the Federal Reserve manages its credit risk exposure associated with daylight overdrafts. The authors first present a simple economic framework for thinking about the causes of credit risk and the possible tools that lenders have to help them manage it. They then apply this framework to the Federal Reserve’s Payments System Risk policy, which specifies the use of a variety of tools to manage credit risk. The study also analyzes a possible increase in the use of collateral as a credit risk management tool, as presented in a recent proposal by the Federal Reserve concerning changes to the Payments System Risk policy.