Ace the 2025 Certified Treasury Pro Test – Cash In on Your Future Brilliance!

The primary way the Federal Reserve addresses systemic risk through setting daylight overdraft limits for member banks is crucial because it helps to ensure the stability of the overall financial system. Daylight overdrafts occur when a bank's payments exceed its available funds during the business day, potentially leading to negative balances in a real-time payment environment. By establishing limits on these overdrafts, the Federal Reserve mitigates the risk that one bank's failure to meet its obligations could trigger a chain reaction affecting other institutions, which could jeopardize the liquidity and stability of the entire banking system.

When banks have clear overdraft limits, they are encouraged to manage their liquidity more effectively, reducing the overall risk of systemic failures. This practice is especially important during stress periods in the financial markets when the ability to manage real-time payments efficiently is critical.

In contrast, while assigning passwords and PINs, establishing intra-day credit limits, and setting minimum reserve requirements all play roles in the overall functioning of the financial system, they do not directly target the risk of one bank's inability to settle transactions impacting others in the same immediate timeframe, which is the core concern addressed by daylight overdraft limits.