June 22, 2000

NOTE TO EDITORS

Enclosed is The Timing and Funding of Fedwire Funds Transfers, an article appearing in the newest issue of the New York Fed’s Economic Policy Review.

Authors James McAndrews and Samira Rajan attribute the late-afternoon peak in Fedwire funds transfer activity to attempts by banks to synchronize their outgoing payments with the large payment inflows they expect to receive later in the day.

The Federal Reserve’s Fedwire Funds Transfer service allows participating depository institutions to transfer funds between accounts held by commercial banks at Federal Reserve Banks. McAndrews and Rajan’s examination of the service reveals that the highest concentration of funds transfer value occurs between 4 p.m. and 5 p.m. each day.

To explain this peak in payment activity, McAndrews and Rajan review the intraday pattern of Fedwire funds transfers. They conclude that:

  • By using incoming transfers to fund outgoing payments, banks avoid the more costly alternatives of drawing down their Federal Reserve account balances or using overdraft credit—which they sometimes must rely on during off-peak times.
  • These cost efficiencies induce banks to time their payments to coincide with a payment activity peak, thereby reinforcing the peak.
  • Many of the thousands of banks participating in Fedwire could benefit from a greater coordination of payment activity.

Consequently, McAndrews and Rajan propose the creation of synchronization periods, in which banks could expect to receive incoming payments entered by paying banks. They argue that effective payment concentration during these periods could enable banks to further reduce financing costs and minimize the number and duration of overdrafts.

James McAndrews is an assistant vice president at the New York Fed. Samira Rajan, formerly an assistant economist at the Fed, is a master’s degree candidate at Harvard University.

Contact: Douglas Tillett