Banks Cheer Proposed Fed Y2K Facility, Want Lower Rate
July 19, 1999 - Wall Street Journal - By Henry J. Pulizzi
WASHINGTON -- The banking industry has one problem with a Federal
Reserve plan to help soothe potential cash problems stemming from the
century date change: it's too expensive.
In public comments on the Fed's proposed "special liquidity facility," banks
and financial interest groups overwhelmingly agree that a separate line of
credit is needed to avoid disruptions created by the anticipated huge
demand for cash at the end of the year. Of the 93 comments the Fed
received before the July 2 deadline for comment, just four feel the program
is unnecessary. Almost all, however, complain that the suggested interest
rate on borrowings under the special credit line is too high.
"With the situation as fluid as it is, and with no way to determine what our
cash needs will be, this proposal goes a long ways towards providing the
means to satisfy the public's concerns at the end of the millennium," said
E.A. Cook III, president of First State Bank in Gothenburg, Neb.
At an open meeting Tuesday afternoon, Fed governors will vote on
whether to implement the facility.
The so-called Y2K bug, which impacts computers that can't distinguish
between the year 2000 and 1900, isn't expected to prompt a major failure
in the U.S. banking system, but Fed officials worry it could lead to minor
disturbances, including unusually large cash withdrawals.
Commentator Unified In Call For Lower Spread
The proposed facility would ease those concerns, banks told the Fed,
especially if the program's loans were priced more attractively. The Fed
plans to charge an interest rate of 1.5 percentage points above the federal
funds rate, which was recently boosted to 5.00%.
Most commentators believe that spread is onerous.
"I hope we don't need to access this source of funds; however, if we do, I
would hate to have to pay that much interest to replace the normal cost of
deposited funds," said John Stipe, president of Forrest City Bank in
Forrest City, Ark.
"While the Fed should not have to bear an undue burden or expense for
potential executions under this proposed arrangement, neither should it
'profit' from the unpredictable events that may lead to usage of this
proposed facility," said John Ennest, vice chairman of Citizens Banking
Corp. in Flint, Mich.
The prevailing sentiment among commentators calls for a spread from 25
basis points to 75 basis points above the funds rate, a margin they say
would signal the Fed's willingness to provide liquidity and calm anxious
financial markets.
But setting the spread requires a delicate balancing act by the Fed, which
wants to establish a rate high enough to encourage banks to look for
alternative private-sector loans and low enough to provide stability in the
face of possible credit market strains. Banks say a high rate on the Y2K
loans might translate into increases in other market rates, while the Fed
frets a low rate will encourage arbitrage activity.
Gordon Glaza, regulatory counsel at the American Bankers Association,
fears the proposed 150 basis point-spread could lead financial
professionals to develop a "stigma" that "would be reflected in the markets
prices of a bank's securities, even though the intent of the special facility is
to discourage such pressure."
"Setting the Y2K special funding cost this high might actually keep banks
from even considering this vehicle as a viable funding source," Glaza said.
Still, the Fed is unlikely to agree, according to Louis Crandall, an
economist with R.H. Wrightson & Associates in New York, who does not
expect the central bank to lower the proposed rate at Tuesday's meeting.
"The mere fact that banks want cheaper money isn't likely to change their
mind," Crandall said. "They don't want to finance a significant chunk of the
banking industry, which is what they might end up doing" if the rate is
lowered.
Banks Want Earlier Access To Special Line
In addition to seeking comment on the facility's interest rate, the Fed asked
for the public's opinion on how long the program should be available.
Under the original proposal, banks would be able to tap the loan pool from
Nov. 1, 1999, through April 7, 2000.
But many of the commentators said they'd like greater access to the credit
line, beginning at least in October. Some pushed for a Sept. 1 opening
because they said many banks expect to start building up cash reserves as
soon as August.
"Institutions may already believe that they will want to borrow prior to
Nov. 1 and may look at the possible sources of cash and wish to time their
borrowings," said Charlotte Bahin, regulatory counsel of America's
Community Bankers.
Wrightson's Crandall said the Fed may comply with requests to lengthen
the facility's lifespan, though such a change is relatively minor.
Facility's Opponents Cite Discount Window Option
Of course, a few dissenters believe the loan program shouldn't exist at all.
"There is no need for a special program ... to perform a function the
Discount Window is well equipped to handle," said Mark Ingalls, senior
vice president of Bridgewater Bank in Bridgewater, Mass. Banks can
access funds from the Fed's discount window at a rate of 4.50%, but that
option is only open to institutions that can't get liquidity elsewhere and most
banks consider it a last resort.
"The proposed facility may generate confusion over selection of alternate
Federal Reserve facilities and may motivate institutions to take action not
consistent with safety and soundness to avoid the cost of using the Special
Liquidity Facility," said Bank One Corp. Executive Vice President Robert
Rosholt.
"By creating a separate program, and pricing it at a known premium above
the federal funds rate, the Fed has now defined, in advance, a liquidity
crisis," said Bridgewater's Ingalls.
interactive.wsj.com
Maybe we should consider shorting some banks???
Cheryl |
