James McAndrews and Samira Rajan

The Timing and Funding

of Fedwire Funds
Transfers
• The dollar value of payments made over the
Fedwire Funds Transfer service reaches its
highest level between 4 p.m. and 5 p.m.
T he timing of payments across the Fedwire Funds Transfer
service exhibits a regular pattern over the course of the day,
with payment activity peaking in the late afternoon.1 This pattern
each day. can be explained, in part, by the fact that banks derive benefits
from coordinating the timing of their payment activity. Many
• This peak in payment activity likely reflects payments made by banks during the day are offsetting. By
efforts by banks to synchronize their outgoing synchronizing payments, banks can take advantage of incoming
payments with the large payment inflows they funds to make outgoing payments. The afternoon peak in activity
reflects, to some extent, banks’ coordination of payment timing
expect to receive in the late afternoon.
in an attempt to tap this funding source.
A full explanation of the timing of funds transfers
• By using the incoming transfers to fund
recognizes two factors that affect banks’ intraday liquidity
outgoing payments, banks avoid the more
management. First, the timing of banks’ payment activity
costly alternatives of drawing down their
reflects underlying customer demand. For example,
account balances at the Federal Reserve settlement of financial transactions customarily takes place in
or using overdraft credit. the late afternoon, which tends to cause a demand for
payments late in the day. Second, such timing also reflects a
• To support the banks’ funding strategy, bank’s response to customer demand for prompt payment.
policymakers might establish formal When responding to this demand, banks incur costs that take
“synchronization periods” and encourage up expensive liquidity resources—either deposits at, or
banks to concentrate payments during overdrafts from, the Federal Reserve System.
these periods. The liquidity cost of making a payment varies with the amount
of coordination involved in payment timing. During periods of
• The resulting increase in payment heavy payment traffic, a bank can, to a greater extent, fund an
coordination could further reduce financing outgoing payment with incoming payments. Conversely, during
costs and minimize the number and duration off-peak times, a bank must rely more on account balances or
of overdrafts. overdrafts to fund payments, which increases the cost of making

James McAndrews is a research officer at the Federal Reserve Bank of The authors thank Paolo Angelini, Shawn Cole, Ed Green, Darryll Hendricks,
New York. Samira Rajan, formerly an assistant economist at the Bank, Jeff Stehm, and John Wenninger for helpful discussions, as well as two
is now a master’s degree candidate in public policy at Harvard University’s anonymous referees. They also thank the staffs of the Federal Reserve Bank of
John F. Kennedy School of Government. New York’s Wholesale Payments Product Office and Credit Risk Management
Division for providing data. The views expressed are those of the authors and do
not necessarily reflect the position of the Federal Reserve Bank of New York or
the Federal Reserve System.

FRBNY Economic Policy Review / July 2000 17

a payment. As a result, banks are induced to time their payments Chart 1
to coincide with an activity peak, thereby reinforcing the peak. Average Daily Fedwire Funds Transactions
Such behavior can lead to the observed aggregate patterns during by Time of Day
periods of light as well as heavy payment activity. Number of transactions
In this article, we measure banks’ alternative funding 10,000
April 1999
sources for Fedwire funds transfers throughout the day, using
8,000
a data set that includes all banks’ Fedwire funds transfers and
Federal Reserve System deposits. This approach allows us to 6,000
gauge the importance of incoming payments as a source of April 1998
funding. We find that incoming payments used by banks to 4,000 April 1997
offset outgoing payments that are entered within the same
minute account for 25 percent of the value of these transfers 2,000
during normal activity periods and as much as 40 percent 0
during peak periods. 0:30 2:30 4:30 6:30 8:30 10:30 12:30 14:30 16:30 18:30
This level of payment coordination is impressive. Sum of ten-minute intervals
However, economic analyses suggest that activity Source: Federal Reserve Bank of New York.
coordination by subjects in similar environments typically
falls short of the level that would allow the subjects to
benefit fully from such coordination.2 Accordingly, with
many thousands of banks participating in Fedwire, there is
reason to believe that the banks would prefer even greater transfers for April 1997, 1998, and 1999 appear in Chart 1.3
coordination of payment activity. Furthermore, greater We see that a flurry of payments occurs at 8:30 a.m., which
synchronization of payments would lead to a decrease in used to be the opening time for the Fedwire Funds Transfer
daylight overdrafts extended by the central bank. With these service. After this flurry, the number of transfers sent per
considerations in mind, we also examine a policy that might minute falls to a much lower level around 9:30 a.m. From
allow banks to coordinate their payment activity even more that trough, the number of transfers grows fairly steadily
effectively: the creation of activity periods that would serve throughout the day, reaching a peak from 2:30 to 4:30 in the
as “focal times” for entering payments. afternoon. Transaction volume declines rapidly after
Our study proceeds as follows. In the next section, we 4:30 p.m. and approaches zero transfers per minute at the
review the intraday pattern of Fedwire funds transfers. We close of the service at 6:30 p.m.
then offer possible explanations for this pattern by examining The very largest payments are even more concentrated
a model of payment timing. Next, we measure the different late in the day. The patterns of payments above the ninety-
sources of Fedwire funding during the day. Finally, we discuss ninth percentile and those below it are shown in Chart 2.
the implications of our findings for various policy issues, The chart indicates that for much of the day, there is a fairly
including the expansion of the operating hours of the Fedwire low level of the largest-value payments. After a sharp
Funds Transfer service and the facilitation of payment increase following 4:30 p.m., once the Clearing House
coordination. Interbank Payments System (CHIPS) has closed, the number
of such payments falls considerably after 5:30 p.m.4 Because
the largest-value payments constitute in dollar terms the
bulk of the value transferred by the Funds Transfer service,
the patterns of these payments strongly influence the
The Timing of Fedwire Payments patterns of value exchanged per minute throughout the day.
Chart 3 confirms that the value exchanged is more heavily
Fedwire is a real-time gross settlement (RTGS) system, in concentrated in the period around 4:30 p.m. than is the
which payment requests are processed and settled by the number of funds transfers. Hence, in terms of the number of
Federal Reserve System as soon as they are initiated by transfers, the dollar value of payments, and the number of
banks. The number of funds transfers sent per minute varies largest-value payments, we can place the peak period for the
over the course of the day in a fairly predictable pattern. The Fedwire Funds Transfer service at 2:30 to 5:30 p.m., with the
average minute-by-minute patterns of the number of peak in value transfer occurring between 4 and 5 p.m.

18 The Timing and Funding of Fedwire Funds Transfers

 Chart 2 Chart 3
Distribution of Fedwire Funds Transactions Value of Average Daily Fedwire Funds Transactions
by Size of Payment by Time of Day
March 18, 1999
Billions of dollars
Number of transactions Thousands of transactions 100
April 1999
300 10
Payments less than 80
250 $75 million
Scale
8
200 60
6 April 1998
150 Payments 40
greater than 4
100 $75 million
Scale
20
2 April 1997
50
0
0 0 0:30 2:30 4:30 6:30 8:30 10:30 12:30 14:30 16:30 18:30
0:30 2:30 4:30 6:30 8:30 10:30 12:30 14:30 16:30 18:30 Sum of ten-minute intervals
Time of day
Source: Federal Reserve Bank of New York.
Source: Federal Reserve Bank of New York.
Note: $75 million is the ninety-ninth percentile for payment size on
March 18, 1999.

of New York (1987) of large-value funds transfers during a

single day in 1986 shows a less concentrated pattern of payment
Durability of Payment Patterns activity during the day. Using data from the report, we
compare the percentage of the day’s payments completed
The Fedwire Funds Transfer service expanded its hours of during various times of the day in 1986—prior to the
operation from ten to eighteen hours in December 1997, so imposition of overdraft fees—with the timing of payments in
that it is now open from 12:30 a.m. until 6:30 p.m. eastern time. 1999 (Chart 4). We see that a larger share of the day’s payments
The change was made mainly to accommodate potential earlier
settlement of foreign exchange trades. However, neither the
timing of activity peaks nor the timing of any other payment
patterns has been significantly affected by the lengthening of
the Fedwire day. Chart 4
The primary difference in payment patterns before and after Percentage of Dollar Volume Completed
December 1997 is the decrease in the number of payments made over Fedwire Funds Transfer Service
at 8:30 a.m.: there has been a decline equal to about 0.5 percent of Percent
the number of payments made between 8:30 and 9:30 a.m. Yet the 0.25 Daily average
percentage of funds transfers made between 12:30 a.m. and for April 1999
0.20
8:30 a.m. remains roughly 1 percent, so some of the activity that
took place at the 8:30 a.m. opening now takes place prior to that
0.15
time. Overall, there has been a slight increase in the share of the
value of payments completed by noon: for the period April- 0.10
June 4, 1986
November 1998, 13.75 percent of the value was completed by that
time, compared with 13.30 percent for the same period in 1997. 0.05
Some evidence suggests that the afternoon peak is higher 0
today than it was prior to the implementation of the pricing of 9:30 10:30 11:30 12:30 13:30 14:30 15:30 16:30 17:30 18:30
daylight overdrafts in 1987. Richards (1995), for example, Time of day
notes that the share of value transferred by noon dropped Source: Federal Reserve Bank of New York.
about 5 percent in the year following the imposition of Notes: Data for 1986 payments include transfers in excess of $1 million.
overdraft fees. In addition, a report by the Federal Reserve Bank April 1999 data include transfers in excess of $1 million in 1986 dollars.

FRBNY Economic Policy Review / July 2000 19

was completed earlier in the day in 1986 than in 1999 (although (b) incoming transfers from other banks, [and] (c) credit
after 5:30 p.m., payments were made more quickly in 1999). At extensions from the central bank.”9
the same time, it is clear that in 1986 there was a substantial Before we discuss liquidity externalities in an RTGS system,
concentration of payments in the late afternoon. In short, the we should look more closely at these three sources of funding.
evidence confirms that payment traffic has long been In particular, we consider incoming transfers from other
characterized by a late afternoon peak. banks. As noted earlier, when a bank exhausts its account
balances at a particular time, it can make additional payments
(without borrowing) if it receives incoming transfers from
other banks. But because banks receive incoming payments
and make outgoing payments throughout the day, it is
Liquidity Externalities and the important to examine the extent to which banks use incoming
Coordination of Payments payments to fund the outgoing ones. We adopt the view that
incoming payments arriving at roughly the same time as
Why are payments, especially the largest ones, concentrated in offsetting outgoing payments serve as a source of funding for
the late afternoon? As noted, this phenomenon may result from the outgoing payments. Conversely, we also adopt the view that
the timing of payment requests by customers and from the incoming transfers that “sit” in the receiver’s account for a long
payments generated by the banks’ own financial activity, which period of time do not fund specific payments. If incoming
may be concentrated at the end of the day so that banks can payments sit in such an account, then we consider payments
settle financial market trades. In addition, banks themselves made long after the bank has received funds as being made by
may time the submission of payments to coincide with the the transfer of balances maintained at the central bank.
incoming payments that they expect to receive late in the day.5
To explain this latter possibility, we first describe the funding
sources for a bank’s payments. Coordination of Payment Timing
It may be surprising to learn that the synchronous receipt of
incoming transfers is a legitimate source of funding for a bank.
Sources of Payment Funding This possibility exists whenever banks exchange payments
throughout the day. For example, assume that Bank A owes
Banks face a budget constraint when making payments: those
Bank B $100, Bank B owes Bank C $75, and Bank C owes Bank A
made in a real-time gross settlement system run by a central
$50. If these payments took place at different times (in this
bank typically are made by transfer of deposit account balances
sequence), Bank A’s balance, for example, would fall by $100 in the
held at the central bank. Although a bank may have other
first period and then would rise by $50 in the third. However, if
assets, RTGS systems generally require that funds be in an
these payments took place simultaneously, Bank A, which owes
account in the system at payment time, so that the systems do
$100, would see its deposit balance fall by only $50 because it
not have to rely on other forms of bank assets.6 Account
balances, then, serve as one source of funds by which a bank
can make payments. However, account balances at central
banks usually pay low interest rates, which creates an incentive Why are payments, especially the
for banks to minimize the amount of funds on account there.7 largest ones, concentrated in the
In the Fedwire Funds Transfer service, as in many other late afternoon?
RTGS systems, banks transfer their account balances to make
payments. Of course, one could reasonably ask, what if a bank’s
account balance falls to zero? For banks that are allowed to
incur daylight overdrafts, that form of credit from the central would receive a $50 payment from Bank C. In this way, the receipt
bank is an additional source of funds that can be used for of the incoming transfer from Bank C allows Bank A to “fund” its
payments.8 Finally, if a bank receives a payment from another $100 payment—half with its own deposit balance and half with
system participant, that payment replenishes its account incoming funds. Although the end-of-day balance for all of the
balance and allows the bank to make outgoing payments. A banks would be the same in either scenario, the uncoordinated
recent report on RTGS systems described these funding sources timing of payments requires the banks either to incur larger
as: “(a) balances maintained on account with the central bank, overdrafts for a longer period or to maintain higher levels of

20 The Timing and Funding of Fedwire Funds Transfers

 The Effect of Synchronization on the Changes in Bank Balances
Asynchronous Payments Synchronous Payments
Partially offsetting payments made at different times result in larger changes Partially offsetting payments made
in banks’ balances. at the same time result in smaller
changes in banks’ balances.
9 a.m. 10 a.m. 11 a.m. 10 a.m.
Bank A pays Bank B $100 Bank B pays Bank C $75 Bank C pays Bank A $50 Banks A, B, and C make payments
100

50

-50

-100
Bank A Bank B Bank C Bank A Bank B Bank C Bank A Bank B Bank C Bank A Bank B Bank C
-$100 +$100 -$75 +$75 +$50 -$50 -$50 +$25 +$25

deposits to avoid overdrafts, relative to the synchronous timing of miscoordination. For instance, one bank enters a payment
payment. If Banks A, B, and C could all coordinate the timing of expecting to receive, but in fact does not get, an offsetting
their payments, each would have a lower funding cost than it payment. Or two banks each delay sending their payments,
would have had it been the first bank to pay. The exhibit presents as one expects the other to send its payment first. In these
the effect of synchronization on the change in the balances of the examples, coordination could be achieved simply by
banks as they make these payments. establishing conventions, such as sending payments regularly
It is important to note that, in this regard, what is true for at a particular time, day after day. The 4:30 p.m. peak in
banks is also true for their customers. Banks impose limits on payment activity might represent such a convention. When
their customers’ overdrafts and charge fees for the use of banks repeatedly send payments to one another day after day,
overdraft credit. Customers, like banks, try to seek the lowest
cost funding for their payments. The timing of payments
among bank customers therefore can lead to similar benefits Synchronization of payments . . . allows
for them. In particular, as customers receive payments, they
can send payments using the incoming funds to avoid (or to
banks to tap incoming transfers from other
limit the size of) overdrafts. In this way, payment coordination banks as a key source of funding.
can reduce the customer’s costs of making payments. We saw
in Chart 4 that a noticeable peak existed in Fedwire payments
prior to the imposition of overdraft fees by the Federal Reserve the repetition in payment patterns can in some cases lead to
System. That pattern likely reflects, to some extent, the successful coordination among a bank and its counterparties.
coordination of customer payments as well as the underlying By concentrating payments in a short period, banks can
timing of other late-in-the-day customer demand, such as for work to resolve the coordination problem. They can then delay
making settlement payments in the financial markets. sending customer requests during the day, provided that the
Although the exhibit illustrates the benefit of coordinating delay is not too costly, if they anticipate that other banks will
payment timing, the difficulty of achieving such a synch- make their payments later in the day (either because of
ronized pattern is considerable because the timing of payments customer requests or because other banks are also anticipating
in some respects resembles a coordination game.10 Banks can that their counterparties will send payments later in the day).
benefit by entering payments simultaneously to Fedwire, but As more and more banks behave in this manner, a peak period
they typically do not know when their counterparties might of payment activity will emerge during which banks receive
send offsetting payments. Hence, there is the potential for payments more frequently than they do at other times. With

FRBNY Economic Policy Review / July 2000 21

these incoming payments, each receiving bank will see its Overdraft Reporting and Pricing System.11 Only those overdrafts
Fedwire balance increase, enabling it to make its own payments outstanding at fifty-nine seconds after the minute are included in
and in turn replenishing the balances of the banks to which it the overdraft fee calculations (Box A describes the calculation of
sends funds. Synchronization of payments thus allows banks to daylight overdraft charges). We adopt a similar method for
tap incoming transfers from other banks as a key source of measuring overdrafts as a funding source for bank payments: we
funding. measure the extension of daylight funds overdrafts in terms of the
It is possible, however, that the amount of synchronization amount by which a bank’s balance falls below zero (or below its
is less than ideal. The Fedwire Funds Transfer service has many negative balance of the previous minute) at the end of a minute,
thousands of participating banks, and each day their payment measured on a minute-by-minute basis throughout the day for all
flows are at least slightly different from the previous day’s banks.12 In other words, this source of funding measures the
flows. In this environment, a bank may be unaware of amount by which a bank’s payments during a minute cause its
incoming funds that may be arriving from a bank with which it account balance to fall into (or further into) a negative position.
rarely exchanges payments. The two banks therefore might not Our measure of incoming transfers of other banks depends
coordinate the timing of their payments as successfully as they on the time of receipt of the transfer. If the incoming transfer
might have if they had full information or if they exchanged quickly offsets an outgoing one, we consider the incoming
payments regularly. Furthermore, economic analyses of similar transfer to be a source of funding for the outgoing payment.
environments suggest that the participants rarely can More specifically, our measure of this source of funding is the
coordinate well enough to take advantage of the full benefits value of incoming payments that offset outgoing payments
of coordination, even with full information. Often, the
participants coordinate less fully than they would prefer.
Repetition of the situation tends to increase the amount It is possible . . . that the amount of
of coordination achieved, while the inclusion of more
[payment] synchronization is less
participants tends to decrease the amount. Although none
of these analyses has been repeated as frequently as the number than ideal. A bank may be unaware of
of times in which a day’s Fedwire payments occur, none has incoming funds that may be arriving
involved as many participants as there are Fedwire banks.
from a bank with which it rarely exchanges
Therefore, the amount of payment coordination among banks
is conceivably less than desirable. payments.

within a minute. We adopt this definition because of its

relationship to the Federal Reserve’s method of measuring
Measurement of the Different overdrafts when assessing fees. As described above, our
Payment Funding Sources measure of payments made by overdrafts is based on the
during the Day amount of overdrafts outstanding at the end of the minute. For
that reason, we choose to measure incoming payments that
We now consider what practical application these observations offset outgoing payments made within the same minute as those
hold for the Fedwire Funds Transfer service. To accomplish that fund outgoing payments. Those incoming payments either
this, we begin by choosing appropriate measures of the prevent the extension of an overdraft that will be included in
different funding sources. Then, using Federal Reserve System the bank’s fee calculation or prevent a reduction in the bank’s
data, we can assess the degree to which banks participating in maintained account balance (exact definitions of the variables
Fedwire use these sources to make payments and we can track appear in the appendix).13 In other words, this source of
that usage at different times of the day. Our goal is to confirm funding is the value of the payments a bank makes during a
that during the peak activity period, banks fund a larger share minute that, because of funds received during that minute,
of their payments with incoming transfers from other banks do not reduce its account balance.
than they do at any other time of the day. After accounting for the payments made by the extension of
We measure the sources of funding available to banks as overdraft credit from the Federal Reserve System and those
follows, beginning with the extension of daylight funds made by the receipt of incoming transfers from other banks, we
overdrafts. To assess fees for banks’ use of daylight credit, assign the remaining payments to banks’ maintained account
the Federal Reserve measures overdrafts using the Daylight balances at the Federal Reserve. In other words, this source of

22 The Timing and Funding of Fedwire Funds Transfers

 Box A
Calculation of Daylight Overdraft Chargesa
As of April 14, 1994, each depository institution using the Fedwire the Federal Reserve multiplies this number by 1/360. The fee
Funds Transfer and Book-Entry Securities services is charged a fee multiplied by the average daily overdraft yields the gross
based on the level of daylight overdrafts it incurs. A daylight overdraft charge.
overdraft is a negative account balance that occurs during the
• Third, institutions have a deductible, which is a level of
operating day.
Before describing the calculation of these fees, we note that all overdrafts that they can incur without having to pay a fee. It
daylight overdrafts incurred by a depository institution are subject allows an institution some flexibility in its liquidity
to a net debit cap. The cap represents the maximum dollar amount management. The deductible is equal to 10 percent of the
of uncollateralized daylight overdrafts that an institution can institution’s qualifying capital for daylight overdrafts. The
incur.b There are several categories that institutions may fall into value of the deductible is subtracted from the gross overdraft
that govern the amount of the cap, and the Federal Reserve System charge to yield the daily charge to an institution. To determine
monitors their account balances to ensure that cap violations do the value of the deductible, the Federal Reserve multiplies the
not occur frequently. deductible by a daily effective rate, as in the calculation in the
The Federal Reserve follows three steps when calculating an previous bullet. However, there is one difference in the
institution’s daylight overdraft fee on a particular day: calculations: although the annual rate by which the threshold
is valued is also 36 basis points, the fraction of the day is
• First, the average per-minute overdraft incurred by the
multiplied by 10/24, rather than by 18/24.
institution on that day is computed. To do this, the Federal
Reserve uses the Daylight Overdraft Reporting and Pricing After ascertaining each of the above parameters, the Federal
System to record all negative end-of-minute balances (fifty- Reserve multiplies the average per-minute overdraft by the
nine seconds after the minute). These negative balances are effective daily rate charged for overdrafts. The value of the
added for the institution for all the minutes of the day in which institution’s deductible is then subtracted from this gross daily
it has had an overdraft (positive end-of-minute balances are charge to arrive at the daily overdraft charge assessed.
not used to offset negative balances). This sum is divided by The Federal Reserve calculates this daily overdraft charge for each
the number of minutes in a standard Fedwire day to arrive at day and totals the charges over a two-week reserve maintenance
the average daily overdraft. Since the expanded operating period. If the sum of the daily overdraft charges incurred during these
hours began, a standard Fedwire day runs from 12:30 a.m. to two weeks is less than $25, the fee is waived.
6:30 p.m. eastern time, for a total of 1,081 minutes.
• Second, the average daily overdraft is multiplied by the fee that a
This section is based on Board of Governors of the Federal Reserve
the Federal Reserve imposes on daylight overdrafts. Currently, System (1998).
this effective rate equals 15 basis points—or 18/24—an b
An institution may choose to increase its capacity for daylight
annualized rate of 36 basis points. This effective rate is the
overdrafts by pledging collateral, but this collateral is applied to
annualized rate multiplied by the fraction of the day during overdrafts related to book-entry securities only. Overdrafts related
which Fedwire operates. To determine the effective daily rate, to funds transfers may not be collateralized.

funding is the value of all payments made during a minute that the three possible sources of funding. It is clear that the
result in a reduced, but positive, balance in a bank’s account. utilization of each source varies over the day. In particular, we
The sum of all these sources of funding equals the sum of see a considerable increase in the funding of payments by
payments sent in each minute. incoming payments of other banks (arriving in the same
Our measures of the different sources of intraday funds are minute) during the late afternoon peak. This effect was
shown in Chart 5, which depicts the average amounts of each anticipated by our model (and by our discussion), which
funding source for all Fedwire funds transfers for March 18, suggests that banks coordinate payment timing during the peak
April 5, May 13, and June 17, 1999.14 The outside line of the afternoon period to take advantage of this funding source.
chart indicates the gross payments made by minute of the day. The shares of the various sources of funding throughout the
The interior lines denote the amount of payments made with day are depicted in Chart 6. Early in the day, nearly all

FRBNY Economic Policy Review / July 2000 23

 Chart 5 Chart 6
Contributions of Funding Sources of Fedwire Shares of Funding Sources of Fedwire
Funds Transfers Funds Transfers
Average of Four Days Average of Four Days over Half-Hour Intervals

Billions of dollars Percent

10 100
Transfer of account balances Transfer of account balances
8 Extension of overdrafts 80
Incoming transfers from other banks
6 60
Extension of funds overdrafts
4 40

2 20
Incoming transfers
0 0 from other banks
0:30 2:30 4:30 6:30 8:30 10:30 12:30 14:30 16:30 18:30 0:30 2:30 4:30 6:30 8:30 10:30 12:30 14:30 16:30
Time of day Time of day

Source: Federal Reserve Bank of New York. Source: Federal Reserve Bank of New York.
Note: Because few payments are made between 12:30 and 8:30 a.m.,
the variation in the shares of funding sources during that period of
the day is driven by a small number of payments.

payments are made by the transfer of maintained balances or had not arrived until hours later. To gauge how a longer
by the use of funds overdrafts extended by the Federal Reserve. period might affect our measure of funding, we compare
As the day progresses, these sources continue to predominate. the amounts of incoming payments that offset outgoing
Finally, as the afternoon payment peak gets under way, payments within a fifteen-minute period and within a one-
incoming payments from other banks that offset outgoing minute period (Chart 8). Again, we see a strong pattern:
payments within the minute become an important component during the peak period, offsetting payments are matched (in
of payment funding. When payments are highly concentrated, time) more effectively than at any other time during the day.
as they are between 4:30 and 5:30 p.m., this (inexpensive) This pattern leads to lower payment costs during the peak
source of funding is the most available and the most utilized. period, which in turn reinforces the payment pattern.
For example, between 4:30 and 5:30 p.m., 16 percent more
payment value is funded by incoming payments within the
minute than is funded between 2:30 and 4:30 p.m. Overall,
35.6 percent of funds transfers are funded by the movements Chart 7
of maintained balances, 39.0 percent are funded by the Value of Payments Matched by Incoming Transfers
Thirty-Minute Moving Average
extension of funds overdrafts, and 25.4 percent are funded
by incoming payments within the minute. Millions of dollars
Chart 7 displays the value of the incoming payments that 3,500
June 17, 1999
offset outgoing payments within the minute across the four 3,000
sample days, illustrating both the pattern of funding and the 2,500
stability of that pattern across the sample days. The March 18, 1999
2,000
correlation between the series in Chart 7 averages .907,
1,500
indicating that payment activity is highly predictable. April 5, 1999
Of course, our measure of the payments funded by 1,000
incoming funds might be considered conservative. For 500
May 13, 1999
example, a bank that receives an incoming payment three or 0
five minutes after making a large payment may still be 8:30 10:30 12:30 14:30 16:30 18:30
Time of day
satisfied that the payment was accomplished with less
expense than it would have been if an offsetting payment Source: Federal Reserve Bank of New York.

24 The Timing and Funding of Fedwire Funds Transfers

 Chart 8 Sensitivity of the Offsetting of Incoming
Payments Funded by Incoming Transfers and Outgoing Payments to the
Compared at Different Intervals Concentration of Payments
Average of Four Days
The calculation of an elasticity measure offers another way to
Value of matched payments (billions of dollars)
10,000 examine the sensitivity of the value of incoming payments as a
Fifteen-minute intervals funding source to the concentration of payments. Box B
8,000 displays a fitted relationship between the percentage of
payments within a minute that are matched by incoming
6,000
payments and the percentage of the day’s payments that occur
One-minute intervals in that minute. We find that a quadratic equation fits the data
4,000 (fifteen-minute
moving average) better than a linear relationship does. Using the fitted
2,000 relationship, we see that the elasticity of the percentage of
payments made by incoming payments that offset outgoing
0
0:30 2:30 4:30 6:30 8:30 10:30 12:30 14:30 16:30 18:30
payments within the minute to the concentration of payments
Time of day at the median minute of activity across the four sample days is
0.25. The elasticity initially rises as the concentration of
Source: Federal Reserve Bank of New York.
payments rises, and averages approximately 0.55 between
4:30 and 5:30 p.m. This elasticity implies that if 1 percent of
payments were transferred from minutes of median payment

Box B
Sensitivity of Funding by Incoming Payments to Payment Concentration

Variables This equation suggests that there is a strongly positive

Incoming payments t : The percentage of the value of minute t ’s relationship between the degree to which payments offset
payments that are offset by incoming payments. within a minute, and the concentration of payments within
Amount of payments t : The percentage of the value of the that minute, throughout most of the range of the sample.
day’s payments that are conducted in minute t . This equation leads to an elasticity of Incoming payments t
with respect to Amount of payments t equal to 0.55 during
Fitted Equation the peak period of payment activity. The elasticity is positive
Incoming payments t = cons tan t + bAmount of payments t in the concentration of payments over the sample, as shown
2
+ c ( Amount of payments t ) + ε . in the chart below.
The parameters constan t , b , and c are to be estimated using
the four days of activity used in the construction of Charts 6-8 in Elasticity of Incoming paymentst with
the text, and ε is an error term. The estimated equation is given by: respect to Amount of paymentst
Incoming payments t = .0564 +76.85 Amount of payments t 0.7

(.001) (1.78) 0.6

2
− 3743.11 ( Amount of payments t )
176.1. 0.5

The standard errors of the parameter estimates are in 0.4

parentheses. All of the estimated parameters are significant at the Average of minutes
0.3 during peak hour = 0.0052
1 percent level. The F value for the equation is 1415 and the
adjusted R2 is .39. 0.2

The fitted equation is increasing for all levels of Sample

0.1
median = 0.00026
Amount of payments t between [0, .01026]. The average of 0
Amount of payments t during the peak hour between 4:30 and 0 00 00 00 00 00 00 00
01 02 03 04 05 06 07
5:30 p.m. is .00521. In fewer than twenty minutes out of the 0.0 0.0 0.0 0.0 0.0 0.0 0.0
4,324 observations does Amount of payments t exceed .01026. Amount of paymentst

FRBNY Economic Policy Review / July 2000 25

volume to minutes of the hour from 4:30 to 5:30 p.m., there overdraft funding to make their early morning payments
would be a net gain of approximately 0.30 percent in the than would be necessary if their payments were designed to
proportion of payments funded by the matching of offsetting take place during the peak in activity.
payments. That is, while 0.25 percent of the matching of The bunching of payments in the afternoon is in accord
offsetting payments would be lost from the median minutes of with our theoretical model: banks are induced to coordinate
payment activity, 0.55 percent would be gained during the peak payments to take advantage of potentially offsetting funds.
hour, for a net increase of 0.30 percent. The coordination of payment activity—the synchronization
It is important to recognize that this relationship is fitted of payments—reflects banks’ expectations that, as a larger
“within-sample”—that is, it is not a forecast of what would number of payments are entered, more of them will be
happen should more concentration of payments occur. offsetting and more may, in part, be funding the settlement
Instead, it records statistically the relationship between the of other payments. This effect results in a greater use of
concentration, or synchronization, of payments, and the incoming payments to fund outgoing payments, which in
amount of funding by incoming payments that accompanies turn would tend to lessen the reliance on account balances
that synchronization in the sample days. Within the sample, or overdrafts to make payments. It saves costs for the banks
the positive relationship between concentration of payments involved and may help to explain the strong peak in
and the matching of offsetting payments suggests that by payment activity.
synchronizing payments, one has an effective way to tap this The decreased reliance on other sources of payment
source of funding. funding, including overdrafts from the Federal Reserve, that
accompanies synchronization of payments not only can
lower costs for commercial banks, but can also reduce
the risk of exposure by the Federal Reserve. As banks
synchronize their payments more closely, the duration of
Discussion overdrafts outstanding would be reduced (and the amount
of overdrafts would likely fall as well). This relationship is
The realization that the concentration of payments
clear if one imagines the extreme case of all payments being
occurring late in the day may reflect the resolution of a
made at the same time: overdrafts would be at a minimum
coordination problem suggests that the pattern is stable and
level in that the simultaneous entry of all payments would
durable. With regard to the recently extended early morning
make maximum use of offsetting payments.16 The reduction
hours of the Fedwire Funds Transfer service, one of the
in the duration, and possibly the amount, of overdrafts that
difficulties faced in encouraging more payments to be made
accompanies the increased concentration of payment
during these hours is how to raise the expectations of banks
that many other banks will also enter payments then. This is timing would therefore reduce the risk of failure to which
a chicken-and-egg problem: until many payments are the Federal Reserve is exposed during the extension of an
actually made early in the morning, any individual early overdraft loan to a bank.
payment will rely more on overdrafts or account balances As we have noted, the degree of payment synchronization
and therefore will be more expensive, at the margin, than if might be less than the ideal amount that banks would
it was made later in the day.15 This general situation is likely choose if they could coordinate their payment activity
to be faced by new systems planning to operate at that time, successfully. If that is so, a greater effort to coordinate
such as the one proposed by CLS Bank or the new CHIPS payment timing may result in a greater share of the day’s
system, which would require that Fedwire payments be payments being funded by the synchronized matching and
made during the early morning hours. For example, CLS offsetting of payments. As our model suggests, this could be
Bank proposes settling matched foreign exchange trades at an underutilized source of payment funding. If greater
the same time across different currencies (see Roscoe [1998] synchronization could be achieved, payments could be
or Board of Governors of the Federal Reserve System [1999] made at lower cost and the risk of exposure by the Federal
for a description). Similarly, the new CHIPS system plans to Reserve could be lessened.
fund an intraday matching system partially with funds sent
to a special account early in the morning (see Nelson [1998]
for a description). Participants in such arrangements may
have to hold additional account balances or utilize more

26 The Timing and Funding of Fedwire Funds Transfers

 Encouraging Payment Synchronization payments in a short period of time. A solution to this
problem may be to increase the length of the synchroni-
If the amount of payment coordination is less than ideal, zation periods, or perhaps to employ a peak-load pricing
policies that encourage greater coordination of payment system that would accurately recover the additional costs
timing might be useful. Of course, such policies should not be incurred by the banks that utilize these periods.
coercive, but should instead provide more opportunities for • The central bank would be extending overdrafts during
banks to coordinate payment timing. the synchronization periods but not assessing fees on
To overcome a lack of payment coordination by banks, the them. Such overdrafts would be made for a slightly
central bank could attempt to guide their expectations by creating different purpose and they would not last as long as
a short period—a focal time—in which banks could expect that overdrafts extended at other times of the day. In
addition, one could view the intrasynchronization-
incoming payments would be entered by other banks. An
period overdrafts as a cost of achieving the coor-
example of such a policy might be the establishment of two ten-
dination that may lower the overall level and duration
or twenty-minute “synchronization periods.” During these
of daylight overdrafts. Nonetheless, firm overdraft
periods, only overdrafts outstanding at the end of the period caps would be necessary to prevent banks from
would be entered into a bank’s overdraft fee calculation. Banks borrowing excessively during the synchronization
would not be charged for any overdrafts that they incurred within periods. In addition, overdrafts that exceed some
the synchronization periods and repaid prior to the end of the threshold could be required to be collateralized.
periods.17 For example, these periods might operate late in the In this way, if large overdrafts accumulated at any
morning and then early in the afternoon peak.18 This policy could time during the day, the central bank’s risk exposure
increase banks’ expectations that many payments, including would be securely capped.
incoming ones, would be entered during the synchronization • Depending on the durability of the existing pattern of
periods. If the policy was successful, a greater percentage of the payments, the synchronization periods might be relatively
day’s payments would be made within short periods and ineffective, attracting few additional payments. The cost
therefore would be offsetting within the periods. Less reliance of implementing the synchronization periods is low.
would then be placed on other sources of funding, including the Moreover, we would expect that any increase in the
extension of overdrafts. In particular, the average duration of amount of payment coordination would require some
overdrafts would decline and overall overdrafts, including those time to achieve, as banks adjust to the changing
opportunities provided by the periods and the behavior
made within the synchronization periods, would fall.
of their counterparties.

Potential Problems . . . and Solutions

Conclusion
A policy such as the one just described could conceivably pose
some problems—yet those problems are not without solutions: Our review of the timing of Fedwire funds transfers suggests
that it is reasonable to expect the observed peak in payment
• The high degree of payment bunching at the end of the day activity. It is likely that some payment requests are coordinated
might increase uncertainty, and could be deleterious to the to be entered during a peak period of activity late in the
smooth functioning of the federal funds market near the
afternoon. This pattern is consistent with the outcome of a
end of the day. The act of timing the synchronization
coordination game among the banks (and among their
periods in the late morning or early in the afternoon
peak could mitigate any problems of delayed resolution customers): as banks synchronize their payments more closely,
of uncertainty. Moreover, as long as the delay in their need for account balances or explicit overdrafts to make
anticipation of the periods results in earlier payments on payments diminishes. This activity makes payments sent
average, the periods would help the participants to during the peak less expensive, at the margin, than payments
overcome the problem of payment delay. sent at other times of the day.
• If the synchronization period is too short, the successful By measuring the funding sources of payments made in the
coordination of so many payments could impose a greater Fedwire Funds Transfer service, we found that approximately
burden on the system’s equipment. This problem represents 25 percent of a day’s payments are funded by incoming
a resource cost, in terms of computers as well as payments that offset payments made by banks within the same
telecommunications links, of handling a large number of minute. This source of funding is more readily available during

FRBNY Economic Policy Review / July 2000 27

the late-afternoon activity peak, when large-value payments are initiative would create synchronization periods in the late
more closely synchronized; such activity accounts for morning and early in the current activity peak. During these
approximately 40 percent of payment funding at that time. periods, banks could run intrasynchronization-period
Payment synchronization benefits banks through the overdrafts and not face any charges for them. Banks could be
reduced costs of making synchronized payments, but it also has encouraged to enter more payments during these periods,
other benefits, as it tends to reduce the amount and duration of which would lead to reduced payment funding costs and a
overdrafts from the Federal Reserve System. The extension of decreased reliance on overdraft funding during the day.
an overdraft creates a slight risk for the Federal Reserve: should Finally, many countries recently have adopted real-time
a borrowing bank fail while an overdraft is outstanding, the gross settlement systems for large-value payments.19 RTGS
Federal Reserve would have to seek repayment in bankruptcy systems offer many advantages in managing risk and in linking
court. For this reason, the Federal Reserve has adopted policies payment flows with securities markets and other payment
to reduce overdrafts (see Board of Governors of the Federal systems in a timely fashion. It is important, therefore, to
Reserve System [1998] for details). The synchronization of understand better the economic incentives and behavior of
payments is another potential tool for the Federal Reserve to participants in an RTGS system. We have focused on the issue
reduce both overdrafts and their duration. of how the cost of liquidity in an RTGS system is affected by the
However, the synchronization process, in its current form, timing of a bank’s payment activity, but many other issues
may be less than ideal for the Fedwire system’s participants. remain to be investigated. With better availability of data—
With that in mind, and with the goal of reducing the extent and and with a range of system designs now operating across
duration of overdrafts, we considered a policy initiative that countries—the potential for further research into these systems
could assist banks in synchronizing their payments. The is greater than ever.

28 The Timing and Funding of Fedwire Funds Transfers

 Appendix: Definition of Variables

 
Dollar value of payments made by Bank i to Bank j in minute t : I t = GrossPayments 1 –  1 ⁄  ½  ∑i ∑j pijt – ∑j pjit    .
 

p ijt .
Funds balance of Bank i at the end of minute t : We decompose the funding of gross payments in minute t
t t into the following sources:
B it = B i0 – ∑ ( p ijs ) + ∑ ( p jis ) , GrossPayments = D t + I t + Allotherpayments .
s=0 s=0

where B i0 is the balance in the bank’s account at the Federal

The last category, Allotherpayments , consists of those
Reserve at the start of the day.
payments funded by the transfer of balances maintained in
Extension of daylight funds overdrafts: banks’ accounts (for more than a minute) at the Federal
Dt = ∑i { min { B it – 0 , B it – B it – 1 } Reserve.
: B it < 0 and B it < B it – 1 } .

Dollar value of payments funded by offsetting incoming

payments within the minute:

FRBNY Economic Policy Review / July 2000 29

 Endnotes

1. Fedwire is a large-value payment system owned and operated by the 10. A coordination game is a social situation in which there are gains
Federal Reserve System. Two services are associated with Fedwire: the to the participants from coordinating their actions—such as everyone
Funds Transfer service and the Book-Entry Securities service. In this in the United States driving on the right-hand side of the road or
article, we focus on the Funds Transfer service, which allows a adhering to a uniform calendar of holidays. A model of a payment
depository institution to transfer funds from an account held at a timing decision that results in a coordination game is available from
Federal Reserve Bank to the account of any other Fedwire Funds James McAndrews.
Transfer service participant.
11. See Board of Governors of the Federal Reserve System (1998) for a
2. See van Huyck, Battalio, and Beil (1990) for an example of such description of the measurement of overdrafts for assessing overdraft fees.
an analysis.
12. Note that we are measuring only funds-related overdrafts. Daylight
3. Throughout this article, the dates chosen for the various calcu- overdrafts created in a transaction involving book-entry securities are
lations were governed by the availability of data at the time the not considered. See Box A for details.
calculations were performed. Here, April data are used because April
was the most recent full month for which data were available. 13. To calculate the amount of offsetting payments, we use an
intraminute “netting ratio,” which is the ratio of gross payments sent in
4. CHIPS, operated by CHIPCo, is a large-value deferred netting a given period to the net change in balances required to make those
system that settles at 4:30 p.m. Banks face constraints within CHIPS payments within the period. In our earlier example, only $50 had to be
on their net debit positions and may be uncertain as to whether a transferred from Bank A to settle all $225 worth of payments. There, the
particular payment can be settled over CHIPS. If a payment does not netting ratio is (225/50) = 4.5, indicating the dollar’s worth of payments
satisfy the constraints during the operating hours of CHIPS, banks being made per dollar of deposit funds. A high netting ratio indicates
tend to send the payment over Fedwire when CHIPS closes. that there is a high degree of offset among the payments being made
during the period. We then measure the amount of offsetting payments
5. Angelini (1998) and Kobayakawa (1997) consider alternative as ( gross payments )∗ ( 1 – ( 1 ⁄ netting ratio ) ). See the appendix for
models of payment timing in a real-time gross settlement system. a more complete explanation.

6. Of course, a bank can sell other assets and add to its account 14. The days represent a sample from a set of days for which we have
balances at the central bank. collected bank balance and overdraft data. For each month between
March and June 1999, two days were randomly chosen as days for
7. Reserve balances at the Federal Reserve are charged a zero which data were collected.
interest rate and are determined by reserve requirements on the
amount of certain deposits at the participating bank. Participating 15. Stehm (1998) points out this issue when reviewing early morning
banks receive earning credits on their required clearing balances at payment activity.
the Federal Reserve; these credits are not transferable to third
parties. 16. We performed a simulation of a multibank payment system
with a random distribution of payments across banks. Moving
8. Banks using the Fedwire Funds Transfer service must stay within from a situation in which banks spread payments evenly across
their “debit cap,” which limits the amount by which they can overdraft several periods to a situation in which payments are all made at the
their account. Some banks have a zero debit cap, which means that same time, the overdrafts of the system fall, and are of reduced
they cannot overdraft their accounts at all. duration as payments are concentrated in fewer periods.

9. Bank for International Settlements (1997). The report included a 17. This policy can be interpreted as a special case of time-varying
fourth category: “(d) borrowing from other banks through the money pricing for overdrafts. That is, banks would not be charged for
markets,” which we include as part of (a). overdrafts incurred during a synchronization period but would be
assessed fees for overdrafts at other times, including the overdrafts
outstanding at the close of the synchronization period.

30 The Timing and Funding of Fedwire Funds Transfers

 Endnotes (Continued)

18. Our analysis suggests that attempts to alter the timing of the
afternoon peak drastically would not be very effective. Placing the
synchronization periods at these particular times—in the late
morning or early in the afternoon peak—would encourage banks
to send more payments then.

19. See Bank for International Settlements (1997).

FRBNY Economic Policy Review / July 2000 31

 References

Angelini, Paolo. 1998. “An Analysis of Competitive Externalities in Green, Edward J. 1997. “Money and Debt in the Structure of
Gross Settlement Systems.” Journal of Banking and Finance Payments.” Bank of Japan Monetary and Economic
22, no. 1 (January): 1-18. Studies 15, no. 1 (May): 63-87.

Bank for International Settlements. 1993. Central Bank Payment Kobayakawa, Shuji. 1997. “The Comparative Analysis of Settlement
and Settlement Services with Respect to Cross-Border Systems.” Centre for Economic Policy Research Discussion Paper
and Multi-Currency Transactions. Basel, Switzerland. no. 1667.

_____. 1997. Real-Time Gross Settlement Systems. Basel, McAndrews, James, and William Roberds. 1999. “Payment Inter-
Switzerland. mediation and the Origins of Banking.” Federal Reserve
Bank of New York Staff Reports, no. 85.
Board of Governors of the Federal Reserve System. 1992. “Notice” in the
Federal Register, October 7. Nelson, Norman R. 1998. “Private Sector Clearing and Payment
Systems.” In Payments Systems in the Global Economy: Risks
_____. 1994. “Notice” in the Federal Register, February 24. and Opportunities. Proceedings of the Federal Reserve Bank
of Chicago’s 34th Annual Conference on Bank Structure and
_____. 1998. “Overview of the Federal Reserve System’s Payments Competition.
Risk Policy,” May.
Richards, Heidi Willman. 1995. “Daylight Overdraft Fees and the
_____. 1999. “Application to the Board of Governors of the Federal Federal Reserve’s Payment System Risk Policy.” Federal Reserve
Reserve System by CLS Services Ltd,” August 6. Bulletin 81, no. 12 (December): 1065-77.

Federal Reserve Bank of New York. 1987. “A Study of Large-Dollar Roscoe, David L. III. 1998. “Continuous Linked Settlement.” In
Payment Flows through CHIPS and Fedwire,” December. Payments Systems in the Global Economy: Risks and
Opportunities. Proceedings of the Federal Reserve Bank
Federal Reserve Bulletin. 1999. “Highlights of Domestic Open Market of Chicago’s 34th Annual Conference on Bank Structure
Operations during 1998.” Vol. 85, no. 4 (April): 217-35. and Competition.

Freeman, Scott. 1996a. “The Payments System, Liquidity, and Stehm, Jeff. 1998. “The Eighteen-Hour Payment Day.” Back-Office
Rediscounting.” American Economic Review 86, no. 5: 1126-38. Focus 37 (April): 5-10.

_____. 1996b. “Clearinghouse Banks and Banknote Over-Issue.” van Huyck, J. B., R. C. Battalio, and R. O. Beil. 1990. “Tacit Coor-
Journal of Monetary Economics 38, no. 1 (August): 101-15. dination Games, Strategic Uncertainty, and Coordination Failure.”
American Economic Review 80, no. 1: 234-48.

The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank
of New York or the Federal Reserve System. The Federal Reserve Bank of New York provides no warranty, express or
implied, as to the accuracy, timeliness, completeness, merchantability, or fitness for any particular purpose of any
information contained in documents produced and provided by the Federal Reserve Bank of New York in any form or
manner whatsoever.

32 The Timing and Funding of Fedwire Funds Transfers