Books
in black and white
Main menu
Share a book About us Home
Books
Biology Business Chemistry Computers Culture Economics Fiction Games Guide History Management Mathematical Medicine Mental Fitnes Physics Psychology Scince Sport Technics
Ads

Managing. The risk of Payment System - Turner P.

Turner P. Managing. The risk of Payment System - John Wiley & Sons, 2003. - 253 p.
ISBN 0-471-32848-0
Download (direct link): managingtherisksofpayment2003.pdf
Previous << 1 .. 30 31 32 33 34 35 < 36 > 37 38 39 40 41 42 .. 88 >> Next

Sending and Receiving Banks
The originator should carefully consider the risk of specifying intermediary banks for its wire transfer payment orders. See the discussion in this chapter about Money-Back Guarantee so the company does not lose this benefit. The circumstances for an originator to name the intermediary bank are unusual.
Important: The risks of the wire transfer payment system are best controlled before a wire transfer order is released by the company to its bank. Preventing errors and fraud are very difficult thereafter.
87
Wire Transfers
STUDY OF A BANK’S PERSPECTIVE OF FUNDS-TRANSFER RISK MANAGEMENT: WIRE TRANSFER SYSTEMS LEND MONEY TO CUSTOMERS
From the perspective of the bank, wire transfer systems “lend money” to their customers. How does this happen? How can systems be designed to reduce the inherent credit risk of such a loan?
Why Do Banks “Lend” Money for Transfers? Intra-Day Loans
There are three reasons that banks “lend” money for transfers:
1. Timing. Commercial wire transfers involve the movement of huge amounts of money from one place to another. This movement creates funding gaps for customers when the orders to transfer funds arrive before “the cover,” the funds covering the outgoing transfer requests. This leads to the bank’s first dilemma—to pay or to wait.
2. Volume. This decision—whether to pay or to wait—would be easy if volumes were small, but customers often have dozens of transfers in flight at the same time. Waiting to match each transfer with its intended cover payment is just not practical. Wire transfer systems handle the work of hundreds and sometimes thousands of customers at the same time. They are also trying simultaneously to control the bank’s own position with settlement and clearing facilities. This makes transfer-to-cover matching even more impractical—not impossible, just impractical.
3. Service. With today’s technology, systems could be built to deal with these issues and avoid all intra-day borrowings, but service would suffer6 One of the most critical ways in which large banks compete with each other for institutional payments business is by making it easy for customers to move these enormous sums, and this means taking some risk. Customers make good use of this service by targeting just the right amount of cover at just the right time at just the right place.
88
Bank’s Perspective of Funds-Transfer Risk Managment
Controlling these intra-day loans, also known as “daylight overdrafts,” is the primary risk management requirement for a wire transfer system.
What Is the Business Process Behind Daylight Overdrafts?
The most obvious risk with daylight overdrafts is that the money is not repaid. Banks protect themselves from this by developing policies that address the establishment, administration, and application of overdrafts.
The first question is, “How much?” Certainly, an Exxon or a General Motors can justify more daylight overdraft than a small local business, but how much more? How much is safe, even for a large corporation? Should this overdraft be considered in conjunction with other limits, such as the credit limit for loans? How much weight should be given to one kind of risk versus another, and how does this weighting affect operational limits?
In most instances, the Daylight Overdraft Limits (DOL) given to large, healthy institutions will be as generous as necessary to make transfer operations work smoothly. This is because it is rare for large corporations, brokers, banks, insurance companies, governments, and others of such entities to go out of business or default on legitimate claims in the middle of the day without some prior warning. But surprises, although rare, do happen, and given the huge amounts of money69 involved, the loss potential is significant.
Another interesting consideration is that different kinds of payments have different settlement risks. Payments made to a clearing house, such as the New York Clearing House (NYCH), for example, are “insured” to some degree by the rules of the association (whereby the members agree to share in a loss caused by certain inabilities to settle—for example, with Clearing House Interbank Payment System (CHIPS) Rule 13). Payments made to a foreign correspondent bank, on the other hand, typically offer no assurance of settlement other than the foreign bank’s agreement to settle the debts associated with its account. Should this
89
Wire Transfers
difference in the level of safety be passed on to the customer in its DOL? That is, should there be a different DOL for each payment method?
For most banks, the answer is a resounding no. It is simply too difficult to administer and track multiple kinds of DOLs in a real-world situation. Accordingly, the DOL established for a customer reflects a blended level of safety for all payment mechanisms.
Because each customer using the wire transfer service will have one and only one DOL, the calculation used during the day to determine whether a requested payment should be made is:
Previous << 1 .. 30 31 32 33 34 35 < 36 > 37 38 39 40 41 42 .. 88 >> Next