serious: what happens in a wire transfer?

[grapejelly]

When a wire transfer is made, what exactly happens?

I understand that in a breakdown of trust, wire transfers are not accepted. Why is this, and what is the wire transfer process that requires trusting the issuing lender?

[grapejelly]

no answers yet? Hey, this is gonna become an important topick...

[grapejelly]

Here is why this is important. If it comes to having to transfer money, we will often be using a wire transfer.

But when the system seizes up, when doubt creeps in, wire transfers won't work the same way. The receiving party doubts the sending party and won't credit you the money.

I found this (http://www.cato.org/pubs/journal/cj16n1-2.html):


Defaults in the payments clearing process can occur when the payment and receipt of funds are not simultaneous, so that funds are disbursed before they are received. As a result, credit is extended by one party to another. In generic modern interbank clearing systems, payment for individual large value transactions may be made to other banks at the time delivery is made, generally electronically by wire transfer, but final settling of net outstanding balances at each participating bank is not made until dayend. Thus, for example, a bank may accept delivery of previously purchased securities, either for themselves or their customers, in midday and pay for them at that time even though it may not have the necessary funds on deposit at the clearing facility at the time. An intraday or daylight overdraft occurs. The bank anticipates having sufficient funds in its account at dayend through scheduled inflows to settle the overdraft, but these inflows are not certain and may not occur. If they do not and represent defaults on obligations from third parties and the resulting losses exceed the bank's capital, the bank in turn will default on its obligations to other banks. Because the same funds may be transferred a number of times among banks before dayend settlement, in case of default, these transfers must be reversed in order to identify who owes whom what. This process is costly, time consuming, and disruptive. Moreover, as described in Bank for International Settlements (1994), Robert Eisenbeis (1995), Flannery (1988), Baer et al. (1991), David Humphrey (1987), George Juncker et al. (1991), Robert Parry (1996), Heidi Richards (1995), and Bruce Summers (1994), because the unwinding may result in losses that could cause other banks along the chain to default, so that losses cascade through the banking system, the payments system is commonly viewed as a source of systemic risk.


To reduce the severity of such disruptions from default, some clearing systems guarantee or provide finality for each individual funds transfer as it occurs. The costs of later, dayend settlement defaults are then borne by the sponsors of the clearing facility (house). Such finality is more credible when the facility is operated by a government agency, e.g., the central bank, than by private entities, e.g., private banks. In the United States, an example of the first type of facility is Fedwire, operated by the Federal Reserve, and of the second type is CHIPS, operated by large New York City banks. Clearings on Fedwire are thus free of systemic risk.


Except for larger and more concentrated exposures, the credit risk assumed by banks in the clearing process is little different from that assumed by them in any transaction. Thus, basically the same techniques for reducing this exposure apply. The bank needs to know and monitor its counterparties, require margin when necessary, impose maximum loan limits, and charge a commensurately high interest rate on any credit extension. The bank's own risk of default is reduced by maintaining sufficient capital in light of its overdraft exposures. The bank may also delegate some of these decisions to the clearing house.


Until recently, the Federal Reserve did little to encourage banks to be greatly concerned about daylight overdrafts in their use of Fedwire. Because all payments were guaranteed by the Fed when made, the risk of default was borne only by the Fed. The Fed neither charged for daylight overdrafts nor applied bank limits on their use. As a result, Richards (1995) shows that the volume rose rapidly increasing the risk exposure to the Fed and, indirectly, the taxpayers. Since the early 1990s, the Fed has both charged for and limited the use of these overdrafts, but it has been reluctant to impose market-based charges for fear of losing business to competing payments systems. Moreover, David Mengle (1995) believes that the Fed may have provided a perception that it had spread the safety net under the payments system broadly by implying that it would assist banks experiencing liquidity problems on private clearing systems. In fact, as described in Eisenbeis (1995), the Fed provided such assistance in 1985 to the Bank of New York when it suffered a computer breakdown in its securities clearing operations and experienced a large deficit in its reserve balance. Thus, similar to the government guarantees on bank deposits, as structured, the Federal Reserve guarantees on payments system transfers in the United States appear to encourage risk taking by banks.

[Tulpen]

When a wire transfer is made, what exactly happens?

I understand that in a breakdown of trust, wire transfers are not accepted. Why is this, and what is the wire transfer process that requires trusting the issuing lender?
I just wired some funds from a brokerage account to a bank but the conversation was unreal. The representative from the brokerage wanted to know why I wanted to wire the money. I was rather stunned, and after a few seconds I could not come up with anything better than telling him in a friendly tone: "That's none of your damn business". He apologized but explained to me they are worried about people taking their money away for, in their minds, unwarranted concerns.

[grapejelly]

This is important stuff because there will come a day when you can't wire money.

The institution that is supposed to receive the wire won't believe in the solvency of the institution sending it.

This has happened before for a short time and I think will happen again.

It's like stock day traders have the illusion of instantly buying and selling stocks. But we know there is a clearing process done in the background and it takes whatever, 3 days I think usually, to clear the transaction that is "instant".

There are numerous transactions we are used to doing, even using a debit card, that depend upon credit although they look like cash transactions.

If there is a financial breakdown that we are fearing at some point, we must bear in mind that many of the normal day to day "cash" transactions we want to make may not be possible for at least awhile.

That is why EJ's recommendation to have actual currency on hand is a good one.

[Louie.G]

Except for larger and more concentrated exposures, the credit risk assumed by banks in the clearing process is little different from that assumed by them in any transaction. Thus, basically the same techniques for reducing this exposure apply. The bank needs to know and monitor its counterparties, require margin when necessary, impose maximum loan limits, and charge a commensurately high interest rate on any credit extension.


Yep and who pays these charges??? Muggins here...

I can send a transfer from my independent US bank via HSBC NY to HSBC NZ and it will arrive within 5 hours (actual time). Fees are reasonable and the international part of the transfer is within HSBC so no problem.

It was usually same day arrival transferring from my "Other" Aus bank (not HSBC) to HSBC NZ. Around May this year delivery time stretched out a day or 2 and hit 4 days in June. Fees nearly doubled. Recent transactions have tended to move back and forth to being on time, but fees are still at the higher level.

For my own interest I researched the Aus Bank and have come to my own conclusions as to why this happened. Obscure announcements by them confirm my findings, (in my eyes). According to the RBA, Aus Banks are well capped and "sound". (hmmm gotta love that "fundamentally sound" phrase)

I am pleased to be contributing to their "Soundness" in my own little way.... NOT!!!!!