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Economic Perspectives, Vol. 11, 2nd, No. 3, May 1987
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.
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