http://nt.excite.com/news/r/990325/17/tech-fedy2k

Do I really need to add comments to this article? Draw your own conclusions...

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Fed Sees Possible Complications From Y2K-Gramlich

(Last updated 5:19 PM ET March 25)

By Caren Bohan

WASHINGTON (Reuters) - The Federal Reserve is worried about its ability to provide emergency loans to banks whose computers might seize up because of the year 2000 bug, a senior Fed official said Thursday.

Speaking to the Senate Banking Committee, Fed Governor Edward Gramlich warned that banks' requests for money through the central bank's discount window could potentially rise "substantially in the future."

"For example," he said, "one or more banks could experience operational problems, perhaps owing to computer failures related to the century date change, that require a large volume of temporary funding from the discount window."

[snip]

Fed officials have repeatedly emphasized that U.S. banks appear to be in good shape for the millennium change and have gone through the necessary rigors of replacing old equipment and testing their systems.

Still, while Gramlich said Thursday he was not predicting a bank computer problem, he said it was still important to be prepared for the possibility that it might happen.

To that end, he asked the lawmakers to support legislation that would permit the central bank to make the necessary loans without running into technical constraints on its balance sheet.

The Fed governor said the balance-sheet constraints have become a concern in light of a trend of a decline in the amount of reserves that banks hold with the central bank.

When customers make deposits into their checking accounts, banks loan out a portion of the money in order to earn interest. They are also required to stash a portion of that money with the Fed for safe-keeping but such reserves are unprofitable for banks since they do not earn interest.

So the banks have found ways to minimize reserves by using computer technology to shift funds among various types of accounts.

Gramlich said that is a problem for the Fed, which by law must maintain a certain amount of assets on hand as collateral to back up its currency -- the U.S. dollar.

The Fed has ample collateral now but it could be forced into some difficult choices if a situation arose where computer failures sent banks scurrying to the Fed for emergency cash.

"If the aggregate need for such loans exceed excess currency collateral, the Federal Reserve Board would be faced with some unpalatable choices," Gramlich said.

He said the trouble caused by that loan demand could even pose complications for the Fed's ability to steer the nation's monetary policy, since adjustments in reserves are a key tool the Fed uses to set interest rates.

"The small margin of available collateral poses a serious problem for the Federal Reserve," Gramlich said. "To date, the Federal Reserve has always had more than enough collateral to back Federal Reserve notes. In recent years, however, the margin of excess currency collateral has been dwindling."

To fix the problem, Gramlich said lawmakers could loosen up restrictions on the types of securities that count as collateral on the Fed's balance sheet. For example, it could lift provisions that prohibit the Fed from counting mortgage securities as collateral.

He also said passing legislation to allow the Fed to pay interest to banks on reserves would help because it would give them an incentive to hold more money with the Fed. ---------------------------------------------------------------------

-- Kevin (mixesmusic@worldnet.att.net), March 25, 1999

Answers

"The Federal Reserve is worried about its ability to provide emergency loans to banks whose computers might seize up because of the year 2000 bug, a senior Fed official said Thursday. "

Wha..?? Is this a mea culpa? Damn, where's Norm when you need him.

-- a (a@a.a), March 25, 1999.

Good one, Kevin.

Play money anyone?

Senate Banking Committee Hearings Online

http:// www.senate.gov/~banking/hrg99.htm

March 1999

http:// www.senate.gov/~banking/hrg99.htm#mar99

Looks like theyre a day behind on posting hearing testimony.

Tomorrow ... is another day.

Diane

-- Diane J. Squire (sacredspaces@yahoo.com), March 25, 1999.

Kevin... amazing. Thanks.

Now, we've all been told over and over again that the Financial area is far ahead of every other area because they started years ago. Why would the Federal Reserve be worried then?

Scary.

Mike ==================================================================

-- Michael Taylor (mtdesign3@aol.com), March 25, 1999.

Hey Kevin,

has anybody nominated this to the Duh-2000 site yet, for their government award? Especially this bit:

"The Fed has ample collateral now but it could be forced into some difficult choices if a situation arose where computer failures sent banks scurrying to the Fed for emergency cash.

"If the aggregate need for such loans exceed excess currency collateral, the Federal Reserve Board would be faced with some unpalatable choices," Gramlich said.

He said the trouble caused by that loan demand could even pose complications for the Fed's ability to steer the nation's monetary policy, since adjustments in reserves are a key tool the Fed uses to set interest rates.

"The small margin of available collateral poses a serious problem for the Federal Reserve," Gramlich said."

sometimes the only correct response really is "well DUH!"

Arlin

-- Arlin H. Adams (ahadams@ix.netcom.com), March 25, 1999.