Post by Sapphire Capital on Jul 11, 2008 6:42:29 GMT 4
An Economic Perspective on the Enforcement of Credit Arrangements: The Case of Daylight Overdrafts in Fedwire
ANTOINE MARTIN
Federal Reserve Bank of New York - Research and Statistics
DAVID C. MILLS Jr.
Federal Reserve Board - Payment System Studies
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Federal Reserve Bank of New York Research Paper Series - Economic Policy Review, Forthcoming
Abstract:
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1141369_code658905.pdf?abstractid=1141369&mirid=1
ANTOINE MARTIN
Federal Reserve Bank of New York - Research and Statistics
DAVID C. MILLS Jr.
Federal Reserve Board - Payment System Studies
--------------------------------------------------------------------------------
Federal Reserve Bank of New York Research Paper Series - Economic Policy Review, Forthcoming
Abstract:
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.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1141369_code658905.pdf?abstractid=1141369&mirid=1