Millennium bug war chest boosted by $115b : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Millennium bug war chest boosted by $115b PETER CHAN

-------------------------------------------------------------------------------- The Hong Kong Monetary Authority (HKMA) is taking further action to insulate the banking system against any possible adverse effects from the Y2K computer problem. The authority will increase the potential supply of short-term funds to the system by $115 billion to prevent interest rates from surging as banks prepare to print more currency ahead of the new millennium.

The move reinforces Y2K preparations by the three note-issuing banks, which have pledged to increase the supply of bank notes in circulation by up to 60 per cent.

Demand for bank notes is expected to rise sharply at the turn of the year as the public holds more cash for fear of computer malfunctions caused by the Y2K bug.

The Y2K computer problem arises because many older computers use only two digits to recognise the date, meaning they cannot distinguish 1900 from 2000, leading to fears that systems could crash on January 1 next year.

A sharp rise in the demand for bank notes and short-term borrowing could lead to a tightening in interbank liquidity and help to drive up short-term rates.

The HKMA offer the $115 billion by widening access to its discount window and providing a term-securities repurchase facility.

HKMA deputy chief executive Tony Latter said: "What we are doing is to pre-empt or mediate any tightening which may arise which could lead to unnecessary shortages of liquidity, surges in interest rates simply because of the year 2000 situation.

"But we are not expecting problems, I hasten to add. It's simply that we cannot afford to be complacent about these developments in the same way as other central banks."

From November 15 to January 31, the HKMA will allow banks to discount the whole of their holdings in Exchange Fund paper at the base rate.

This will enable them to borrow more at cheaper rates, increasing the potential supply of liquidity in the banking system.

Under existing arrangements, only the first 50 per cent of holdings is discountable at the base rate, with the next 50 per cent subject to a 5 percentage-point premium.

Banks will also be allowed to borrow overnight funds for an unlimited number of times using other specified securities as collateral during the period.

This is equivalent to suspending the existing "repeated-borrower restriction" under which banks can borrow using this method a maximum of eight times over a 25-day period.

The measures will increase the total amount of securities eligible for discount window access by $85 billion to $184 billion.

From December 1 to January 31, the HKMA will provide a repurchase facility against Exchange Fund paper, United States Treasuries and other triple-A-rated US dollar paper in maturities of seven days, 14 days or one month.

Mr Latter said the facility would enable banks to lock in their costs of obtaining short-term Hong Kong dollar funds for the year-end period.

Mr Latter said the HKMA would still allow interest rates to rise "in the event of speculative capital outflows".

"What we don't want to do is to put in measures to switch off that adjustment mechanism too absolutely," he said.

Mr Latter added the measures could start earlier than mid-November and finish later than the end of January if the market situation required it.

I wonder if the HKMA will be giiving sermons to the local religious leaders next?

-- Johnny (JLJTM@BELLSOUTH.NET), September 07, 1999

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