Daylight Overdraft Explained 2025: Costs, Mechanism, and Real-Life Example

Daniel Rathburn is a seasoned editor at Investopedia specializing in tax, accounting, regulatory, and cryptocurrency topics.

What Is a Daylight Overdraft in 2024?

A daylight overdraft happens when a bank withdraws more funds than it holds in its Federal Reserve account during the day to complete a payment. This temporary overdraft must be resolved by the end of the business day to maintain financial stability.

Key Points to Remember

• Daylight overdrafts occur when banks send out more money than their reserve balances during regular business hours.
• Unlike overnight lending, these overdrafts happen intraday and require prompt settlement.
• The Federal Reserve permits certain banks to overdraft based on their financial strength and expected incoming payments.
• The allowed overdraft amount depends on the bank’s capital and risk profile.

How Daylight Overdrafts Work

The Federal Reserve operates the Fedwire payment system, allowing thousands of banks to settle funds. Some banks receive authorization to overdraft their accounts temporarily, relying on incoming payments to cover the shortfall by day’s end. These are called intraday or daylight overdrafts.

Each bank’s daylight overdraft limit is set according to its financial health. While some banks have no overdraft privileges, others can overdraw up to 187.5% of their capital, a measure used by the Fed to assess risk-based capital adequacy.

To discourage excessive reliance on daylight overdrafts, the Federal Reserve imposes fees. Though these overdrafts enhance liquidity and efficiency in the financial system, they carry systemic risk if multiple banks overdraw simultaneously, potentially disrupting money flow and economic stability. In such cases, the Fed may enforce stricter oversight.

Usually, banks settle reserve imbalances overnight through lending markets, but daylight overdrafts provide short-term liquidity during the day. Central banks also use term auction facilities to support liquidity over longer periods.

Important Note

The Federal Reserve charges fees on daylight overdrafts to prevent frequent or excessive use by banks.

Example of a Daylight Overdraft

Imagine Bank ABC with $250 million in assets and a 10% reserve requirement ($25 million). If the bank needs to transfer $30 million during the day, it creates a $5 million daylight overdraft. The bank must repay this overdraft by the end of the day, often borrowing from the Federal Reserve and paying a fee.

Daylight Overdrafts for Individuals

Many banks offer personal daylight overdrafts, allowing customers to temporarily exceed their account balance during the day without immediate fees. If the customer replenishes the funds by day’s end, no charge applies. Otherwise, an overdraft fee—commonly around $30 per transaction—is assessed.

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