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Liquidity effects of the events of September 11, 2001

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  • James J. McAndrews
  • Simon M. Potter

Abstract

Banks rely heavily on incoming payments from other banks to fund their own payments. The terrorist attacks of September 11, 2001, destroyed facilities in Lower Manhattan, leaving some banks unable to send payments through the Federal Reserve's Fedwire payments system. As a result, many banks received fewer payments than expected, causing unexpected shortfalls in banks' liquidity. These disruptions also made it harder for banks to redistribute balances across the banking system in a timely manner. In this article, the authors measure the payments responses of banks to the receipt of payments from other banks, both under normal circumstances and during the days following the attacks. Their analysis suggests that the significant injections of liquidity by the Federal Reserve, first through the discount window and later through open market operations, were important in allowing banks to reestablish their normal patterns of payments coordination.

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Bibliographic Info

Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2002)
Issue (Month): Nov ()
Pages: 59-79

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Handle: RePEc:fip:fednep:y:2002:i:nov:p:59-79:n:v.8no.2

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Related research

Keywords: Fedwire ; Electronic funds transfers ; War - Economic aspects ; Bank liquidity ; Payment systems;

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Citations

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Cited by:
  1. Ellis W. Tallman & Jon R. Moen, 2007. "Liquidity creation without a lender of last resort: clearinghouse loan certificates in the Banking Panic of 1907," Working Paper 2006-23, Federal Reserve Bank of Atlanta.
  2. Gara M. Afonso, 2008. "Liquidity and congestion," Staff Reports 349, Federal Reserve Bank of New York.
  3. Merrouche, Ouarda & Schanz, Jochen, 2010. "Banks' intraday liquidity management during operational outages: Theory and evidence from the UK payment system," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 314-323, February.
  4. Beyeler, Walter E. & Glass, Robert J. & Bech, Morten L. & Soramäki, Kimmo, 2007. "Congestion and cascades in payment systems," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 384(2), pages 693-718.
  5. Gara M. Afonso & Hyun Song Shin, 2008. "Systemic risk and liquidity in payment systems," Staff Reports 352, Federal Reserve Bank of New York.
  6. Jeffrey M. Lacker, 2003. "Payment system disruptions and the Federal Reserve following September 11, 2001," Working Paper 03-16, Federal Reserve Bank of Richmond.
  7. Luca Arciero & Claudia Biancotti & Leandro DÂ’Aurizio & Claudio Impenna, 2008. "Exploring agent-based methods for the analysis of payment systems: a crisis model for StarLogo TNG," Temi di discussione (Economic working papers) 686, Bank of Italy, Economic Research and International Relations Area.
  8. Todd Keister & Antoine Martin & James McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 41-56.
  9. Morten L. Bech & Rod Garratt, 2006. "Illiquidity in the interbank payment system following wide-scale disruptions," Staff Reports 239, Federal Reserve Bank of New York.
  10. Xavier Freixas, 2009. "Monetary policy in a systemic crisis," Economics Working Papers 1200, Department of Economics and Business, Universitat Pompeu Fabra.
  11. Ilhyock Shim & Goetz von Peter, 2007. "Distress selling and asset market feedback," BIS Working Papers 229, Bank for International Settlements.
  12. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
  13. Hellqvist , Matti & Laine, Tatu, 2012. "Diagnostics for the financial markets – computational studies of payment system: Simulator Seminar Proceedings 2009–2011," Scientific Monographs E:45/2012, Bank of Finland.
  14. Tallman, Ellis W. & Moen, Jon R., 2012. "Liquidity creation without a central bank: Clearing house loan certificates in the banking panic of 1907," Journal of Financial Stability, Elsevier, vol. 8(4), pages 277-291.
  15. Neville Arjani, 2006. "Examining the Trade-Off between Settlement Delay and Intraday Liquidity in Canada's LVTS: A Simulation Approach," Working Papers 06-20, Bank of Canada.

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