riday May 28 3:09 AM ET Fed Proposes Y2K Loans to Banks

By MARCY GORDON AP Business Writer

WASHINGTON (AP) - Banks, thrifts and credit unions would get special loans under a Federal Reserve plan designed to make sure they can handle any emergency caused by fears over Year 2000 computer problems.

The central bank is seeking public comment on the proposal, which would offer the loans from Nov. 1 through next April 7.

The plan would allow banks, thrifts and credit unions ``to confidently commit to supplying loans to other financial institutions and businesses through the rollover to the new century,'' the Fed said in a statement.

It was the second major step taken by the central bank designed to avert possible disruptions in the nation's banking system because of the so-called Y2K computer problem.

Last year, the Fed ordered an additional $50 billion of new currency to put into circulation in the event people make a run on banks and automated teller machines late in the year. By year's end, $200 billion in currency will be stored in government vaults, up from the $150 billion normally held in reserve. That's in addition to the $460 billion in notes circulating in the United States and abroad.

Jim McLaughlin, director of regulatory affairs at the American Bankers Association, said the special loans would provide an extra cushion of cash to the system as a backup if needed, although the trade group anticipates that very few banks will have to use it.

The central bank acknowledged that ``uncertainty surrounds potential developments over the period'' because of the millennial date change. But it stressed that it does not expect widespread or prolonged computer disruptions from the technology problem, caused by the possibility that some computers originally programmed to recognize only the last two digits of a year could interpret 2000 as 1900.

-- Norm (nwo@hotmail.com), May 28, 1999

Answers

Let's see: a bank has a (simplified) balance sheet of 1,000,000 in deposits balanced by 900,000 in outstanding (relatively long term) loans, 50,000 in securities (T-Bills), and 50,000 in cash. Depositers want their money back, so bank cashes out what it can and goes to the Fed. Now we have bank balance sheet of: Fed has loaned 900,000; bank has 900,000 in outstanding loans... Once the money is out, many banks might use major promotions to get people to deposit in THEIR banks. If depositers don't redeposit in our bank, come April 7, our bank could be in serious default to the Fed. As a matter of fact, at this point, the Fed IS the bank. The final question is what would the Fed do in such a scenario?

Let's add April 7, 2000 to our list of dates to watch out for!

-- Mad Monk (madmonk@hawaiian.net), May 28, 1999.