Technology and flexibility the key to banks’ response to NY attacks, says Greenspan

WORLD TRADE CENTER AFTERMATH

WASHINGTON -- The US financial and banking system’s ability to overcome the operational difficulties created by the September 11 attacks on New York and Washington was a testament to its technology and flexibility, US Federal Reserve system chairman Alan Greenspan said in late October.

The response was a metaphor for the US economy’s ability to circumvent difficulties, innovate around obstacles and for the country’s decentralised and diversified economic structure, Greeenspan told the American Bankers Association’s virtual annual conference.

The conference, which was to be held in Palm Desert, California, was postponed out of respect for the lives lost in the attacks and instead held online in late October. That in itself was an example of the industry’s flexibility, Greenspan said.

He listed several examples that he said demonstrated the creativity of the US system in the face of the catastrophe:

There were difficulties in rolling over maturing commercial paper, with borrowers and lenders uncertain whether markets were open and with communications between issuers, their banks and the settlement system impaired.

But the resulting shortfalls in the coverage of billions of dollars of maturing paper were managed by rolling failed trades into the next day’s settlement or by drawing on bank lines, causing bank assets to balloon for a few days.

Disruptions to communication connections and the shift to back-up sites delayed payments and settlements, with billions of dollars in funds building up at a small number of participants unable to send out funds. These were covered by similar amounts of Federal Reserve open market operations, overdrafts and loans to those who could not receive.

A record volume of thirty-day swap lines was arranged with major central banks to help the channelling of dollar liquidity to foreign banks operating in the US.

Fed and bank balance sheets ballooned with the maldistribtuion of reserves and domestic and foreign operations, but there was no fear of either credit or liquidity risk.

Fed funds borrowers and lenders, forced to deal directly because brokers were temporarily unavailable, quickly reached agreements to trade at the targeted federal funds rate.

Dealers voluntarily extended the settlement period in the US government bond market to five-days in response to the loss of staff and equipment at some firms.

Lenders, banks in particular, stepped up to meet their commitments, real and implied, to avoid the disruptions that were a large part of the objective of the terrorists believed to have carried out the attacks.

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