FED'S PARRY SEES LITTLE Y2K THREAT TO U.S. ECONOMY
Wednesday, July 14, 1999
LOS ANGELES (Reuters) - Federal Reserve Bank of San Francisco President Robert Parry Tuesday predicted that a potential lack of Y2K-readiness in some foreign countries does not present a big threat to the U.S. economy.
''I do not see it as a major threat to our economy at this time,'' Parry told a Town Hall Los Angeles forum.
Since older computers were programmed using only the last two digits of the year, systems that have not been upgraded could fail when the year changes from 1999 to 2000.
Parry said most industrialized countries are up to speed on year 2000 readiness, but there are indications some African and Southeast Asian countries may not be as well-prepared.
Parry repeated previous assurances that the U.S., including the banking industry, will not experience any serious problems when the year 2000 starts.
As of May 31, the Federal Reserve said 98.3 percent of U.S. banks met standards for Y2K compliance and it was working with the remainder to make sure they get there.
Parry also said it was unlikely that spending on Y2K programs would have a major impact on the U.S. gross domestic product (GDP) growth.
''It could have a very small effect, perhaps adding a couple of tenths to GDP in 1999 and perhaps subtracting a couple of tenths in 2000,'' Parry said, noting that planning for the date change has led to a surge of new equipment orders this year.
At the same time, businesses and others have delayed projects until after the new year, and the launch of that spending could very well add to U.S. economic growth next year, Parry said.
Fed Chairman Alan Greenspan is expected to announce to Congress on July 22 the Fed's revised GDP growth forecast for 1999.
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Speaking of Federal Reserve Bank of San Francisco ...
FEDERAL RESERVE BANK OF SAN FRANCISCO
Y2K Liquidity Contingency Planning
Here are some suggestions for shaping your Y2K liquidity contingency plan:
1.When you estimate how much liquidity you may need for a Y2K problem, we strongly suggest that you focus on developing a worst-case scenario. Consider two points.
First, there is little need to plan for a minor increase in the demand for cash. Most banks can easily accommodate minor increases in deposit withdrawals and loan demand from existing liquidity sources.
Second, the risks and rewards associated with liquidity are asymmetrical. By that we mean that the risk of having too much liquidity - less robust profits - is almost always much smaller than the risk of not having enough liquidity - in the extreme, bank failure.
Consequently it makes sense to focus contingency planning on a potentially severe crisis.
2. Don't look in the rear view mirror to formulate your estimates of liquidity needs. In the last two decades, most bank liquidity crises have been institution specific. Typically a single bank goes through one or more events, such as public announcements of large loan losses that erode the confidence of uninsured depositors who then begin to
withdraw their funds. Any Y2K liquidity crisis is likely to significantly different.
Consider that: In a typical institution-specific liquidity crisis, during the 1980s and 1990s, when confidence in a bank became an issue, the funds most often withdrawn were uninsured portions of deposit balances and uninsured loans to the bank such as federal funds sold.
However in a Y2K liquidity crisis, it seems reasonable to expect that insured funds might be withdrawn. Indeed it is plausible that more insured than uninsured deposits might be withdrawn. Some consumers and businesses may withdraw cash because they expect that Y2K computer failures will cause a devastating collapse.
Arguably a much larger number are likely to withdraw cash because they are worried about temporary disruptions in the payment system and want to have more cash on hand for transactions. The key here is that neither group is likely to make different decisions for insured deposits than they make for uninsured deposits. Your contingency
plan should assume a level of withdrawals from insured deposits that is no less than the level it assumes for uninsured funds.
In a typical institution-specific liquidity crisis during the 198Os and 1990s, the biggest liquidity headache was deposit withdrawals. However, in a Y2K liquidity crisis, it seems reasonable to suspect that funding loan commitments may be an equal or even larger liquidity headache. Instead of cash reserves, many customers and businesses rely on lines of credit for liquidity. Many consumers and businesses do not keep much extra money in checking, NOW, savings and MMDA accounts. Either they do not have such extra cash or, if they do, they have it invested in CDs, stocks or bonds.
Consumers who want to hold cash in January of 2000 are probably going to get that cash from their credit cards, their unsecured personal lines and their home equity lines.
Businesses who want to hold cash may likely draw down their existing lines of credit. Your Y2K liquidity contingency plan should assume a high level of new advances for existing credit cards and lines of credit.
If there is a Y2K liquidity problem, it will probably impact financial markets, not just individual financial institutions. In a typical, institution-specific, liquidity crisis, like those we saw in the 1980s and 1990s, a bank could easily sell marketable assets like Treasury securities to raise cash quickly. Often the issue for those banks was simply whether or not they had enough marketable assets. The situation in a systematic crisis is quite a bit different.
In a systemic crisis. lots of investors try to sell their marketable securities. As a result, prices for those securities plummet. Your Y2K liquidity plan should not emphasize the sale of marketable securities as a primary source of new funds.
In a typical-institution specific liquidity crisis during the 1980s and 1990s, borrowing from the Federal Reserve discount window was often the funding source of last-resort. Borrowing from the Federal Reserve gave market participants and the public the impression that the bank was in a deep financial hole. Whether or not the bank actually was in serious trouble, the perception created by the Fed borrowing was not helpful.
A Y2K liquidity problem, on the other band, does not reflect more badly on your bank than it does on any other financial institution. It is a systemic crisis. As a result, borrowing from the Fed is not likely to generate a perception that fuels any loss of confidence in your bank.. Borrowing from the Fed discount window should be emphasized in your Y2K liquidity contingency plan.
ESTIMATING YOUR WORST-CASE LIQUIDITY NEED
OR LIQUIDITY CONTINGENCY
Planning for Deposits
A typical liquidity contingency plan focuses on some percentage of deposit loss. In other words, it might look at the impact of twenty, forty or sixty percent losses in uninsured funds. For your Y2K liquidity contingency plan, it might make more sense to look at fixed dollar losses. If potential deposit losses are driven more by a desire to hold cash for transactions than by a loss of confidence in the system. It might make more sense to base your estimate of deposit losses on the number of customers ...
Loan Funding
Here are four suggestions for estimating the amount of worst-case Y2K loan funding demand ...
VERY INTERESTING READING
frbsf.org
Some other interesting links:
FED Wants Better Risk Monitoring at Big Banks
WASHINGTON, June 24 (Reuters) - The Federal Reserve said on Thursday it has asked banking supervisors to improve their monitoring of risk-taking by big, complex banks that account for a growing share of U.S. banking assets ...
Message 10275104
BIS: Basle Committee on Banking Supervision
Planning by Financial Market Authorities for Year 2000 Contingencies
bis.org
Banks Fear Shortage of Armored Cars to Haul Cash
SUV Vehicles?? ... The Federal Reserve Bank of Minneapolis, which dispenses cash to banks, isn't happy about the security risks involved in moving large amounts of money in civilian vehicles and is discouraging banks from doing it. However, the Fed doesn't have the power to prevent banks from transporting money that way ...
Message 10201998
Cheryl
170 Days until 2000 |
