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What is a Daylight Overdraft?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 27 November 2016
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In banking, a daylight overdraft is a situation in which a financial institution makes transfers which exceed the amount of funds it has in reserve. While the overdraft is expected to be corrected by the end of the day, it can create risk. For this reason, fees are charged when a daylight overdraft occurs, as an incentive to avoid such situations. The central bank monitors reserve supplies and assesses fees as needed if banks exceed their reserves.

Financial institutions move large amounts of money around every day, and there are a variety of reasons why a daylight overdraft might be incurred. Central banks want to avoid these situations because if multiple banks experience overdrafts, it can destabilize the banking system and may generate unnecessary risk. Essentially, the central bank makes a temporary loan to these banks to keep their accounts positive, and it charges for this just like banks do for other types of loans.

Reserve requirements are calculated as a percentage of total deposits held at a bank. The requirements vary depending on the nation and may be periodically adjusted. Such requirements are designed to increase the security and stability of the financial system. A daylight overdraft eats into the reserve requirements and thus is something which authorities want to see corrected quickly.

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Monitoring of financial institutions includes monitoring of transfers of funds for signs of a daylight overdraft, along with other measures which are designed to protect the safety of both individual consumers and the overall financial industry. Banks which routinely have problems may be singled out as troubled banks and monitored more closely so that intervention can be provided promptly if it becomes appropriate. Intervention can include a takeover of a bank by government authorities, often with the goal of preparing it for transfer to a more stable bank.

People may also use this term in reference to personal accounts. Sometimes people end up with a temporary overdraft as a result of transfers in and out of their accounts. Different banks handle these situations differently; customers may be charged an overdraft fee or may be given some leeway. For example, if someone deposits money into an automatic teller machine (ATM) and a check posts at the same time, a daylight overdraft might occur because the ATM deposit will not post until the evening, but the bank might recognize that the customer had the funds to clear the check, in which case an overdraft fee might be waived.

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