- The Federal Reserve’s Fedwire funds transfer service—the biggest large-value payments system in the United States—has long displayed a concentrated peak of activity in the late afternoon.
- Theory suggests that the concentration of late-afternoon Fedwire activity reflects coordination among participating banks to reduce liquidity costs, delay costs, and credit risk; as these costs and risk change over time, payment timing most likely will be affected.
- The sending of large payments late in the day can heighten operational risk by increasing the potential magnitude of liquidity dislocation and risk if operational disruptions were to occur.
- Armantier, Arnold, and McAndrews quantify how the changing environment in which Fedwire operates has affected the timing of payment value transferred within the system between 1998 and 2006.
- The study finds that the peak of the timing distribution has become more concentrated, has shifted to later in the day, and has divided into two peaks.
- The authors attribute the changes in payment timing in Fedwire to several factors:
- changes in Federal Reserve System policies that govern the provision of daylight overdrafts,
- variations in the value and volume of payments, and
- changes in the flow of payments from private sector settlement institutions.
- The study’s results provide no specific evidence of heightened operational risk attributable to activity occurring later in the day; however, they point to a high level of interaction between Fedwire and private settlement institutions.