An Economic Perspective On The Enforcement Of Credit Arrangements: The Case Of Daylight Overdrafts In Fedwire

Credit arrangements between a borrower and a lender are a prevalent part of the economy. A fundamental concern for any lender is the risk that the borrower fails to fully repay the loan as expected, a type of risk called credit risk. Thus, lenders want credit arrangements that are designed to compensate them for - and help them effectively manage - credit risk. In certain situations, central banks engage in credit arrangements as lenders to banks. For example, the Federal Reserve offers certain banks overnight loans at the discount window.