Would banks buy daytime fed funds?
This paper considers what might happen
to the fed funds markets if the limits or "caps"
on Fedwire daylight overdrafts (DODs) were
significantly lowered. 4 Currently, caps are not
very restrictive and banks are finding relatively
inexpensive ways to reduce DODs (e.g., by adjusting
the timing of various intraday inflows
and outflows, substituting various term fed
fund instruments for overnight fed funds, etc.).
However, if caps become restrictive and alternative
ways to lower DODs become too expensive,
the current fed funds markets would
probably be supplemented. Two alternatives,
a separate intraday fed funds market and a
separate overnight fed funds market with
24-hour maturities, might develop to allow
participants to balance their intraday funding
positions with their overnight positions.' These
two innovations could be operationally feasible,
would reduce DODs and associated risks, and
would maintain the efficiency and usefulness of
the large dollar wire transfer systems. Finally,
the paper discusses the likely effect of an intraday
funds market on corporate customers.