U.S. banks told to monitor Y2K capital swings

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-- Linkmeister (link@librarian.edu), September 28, 1999


Tuesday September 28, 6:29 pm Eastern Time

U.S. banks told to monitor Y2K capital swings

WASHINGTON, Sept 28 (Reuters) - U.S. banks were told Tuesday to prepare for the possibility that big swings in deposits before Year 2000 could put them in violation of reserve requirements.

As long as banks could show that any such situation was temporary, they could avoid getting into trouble with bank industry supervisors.

The four federal banking regulators -- the Federal Reserve, Federal Deposit Insurance Corp, Comptroller of the Currency and Office of Thrift Supervision -- issued a joint statement telling banks to set up contingency plans to show how they would manage such a possibility.

``Unusual market responses to the century date change could lead to temporary balance sheet growth at some banking organizations during the century date change,'' the statement said.

That could occur of large deposits in search of safe haven flowed in before the Year 2000 changeover or if companies drew down lines of credit or sought new lines to boost liquidity at year-end.

Banks are legally required to set aside a proportion of their deposits as reserves but could find themselves pushed into violation by sudden swings in deposits.

``Some organizations that experience significant Year 2000-related asset growth may, despite prudent balance sheet management techniques, also experience a temporary decline in their regulatory capital ratios as a result of responding to their customers' needs,'' the Fed said.

Normally, that would result in ``certain consequences for the organization'' under federal banking rules. Banks were told they must be prepared to swiftly draw such situations to supervisors' attention, show they remain in sound financial condition and provide evidence that any fall in capital ratios was temporary so that regulators could take that into consideration.


-- Linkmeister (link@librarian.edu), September 28, 1999.

This is no real surprise. The FED is concerned about the effects of a Y2K panic, and wants to keep the banks solvent. This action cleans up a very messy possibility...that of depositors removing cash from the bank to the point that it no longer meets the reserve requirements. Any serious bank panic would do this... Does the FED want to declare the bank insolvent? Of course not! If they did, it would cause panics at other banks...and the whole system could go down. If you were the FED, you'd be doing the same thing...

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

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