Daylight Overdraft

The concept of “robbing Peter to pay Paul” is not lost on banks. It is, in fact, practiced mechanically, if not completely (but arguably in good part) in spirit, by use of the Daylight Overdraft.

Banks settling transactions between other banks use the Fedwire system, which is controlled by the Federal Reserve Bank. Depending on its individual risk profile, a given bank is allowed to overdraw its Federal Reserve accounts on an intraday basis to settle transactions, provided their incoming revenues for the day will be used to pay off previous obligations before the close of business so that the account zero balances out.

Peter. Paul. No Mary.