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Payment system disruptions and the Federal Reserve following September 11, 2001

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Jeffrey M. Lacker

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Abstract

The monetary and payment system consequences of the September 11, 2001, terrorist attacks are reviewed and compared to selected U.S. banking crises. Interbank payment disruptions appear to be the central feature of all the crises reviewed. For some the initial trigger is a credit shock, while for others the initial shock is technological and operational, as in September 11, but for both types the payments system effects are similar. For various reasons, interbank payment disruptions appear likely to recur. Federal Reserve credit extension following September 11 succeeded in massively increasing the supply of banks’ balances to satisfy the disruption-induced increase in demand and thereby ameliorate the effects of the shock. Relatively benign banking conditions helped make Fed credit policy manageable. An interbank payment disruption that coincided with less favorable banking conditions could be more difficult to manage, given current daylight credit policies.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 03-16.

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Date of creation: 2003
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Handle: RePEc:fip:fedrwp:03-16

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Keywords: Federal Reserve banks ; Monetary policy ; Payment systems;

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  1. Charles W. Calomiris & Gary Gorton, . "The Origins of Banking Panics: Models, Facts, and Bank Regulation," Rodney L. White Center for Financial Research Working Papers 11-90, Wharton School Rodney L. White Center for Financial Research.
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  2. Stephen A. Lumpkin, . "Repurchase and reverse repurchase agreements," Monograph, Federal Reserve Bank of Richmond, number 1998rarr. [Downloadable!]
  3. Timberlake, Richard H, Jr, 1984. "The Central Banking Role of Clearinghouse Associations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(1), pages 1-15, February. [Downloadable!] (restricted)
  4. Alan Greenspan, 2001. "The financial safety net," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 1-8.
  5. Antoine Martin, 2002. "Optimal pricing of intra-day liquidity," Research Working Paper RWP 02-02, Federal Reserve Bank of Kansas City. [Downloadable!]
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  6. James J. McAndrews & Simon M. Potter, 2002. "Liquidity effects of the events of September 11, 2001," Economic Policy Review, Federal Reserve Bank of New York, issue Nov, pages 59-79. [Downloadable!]
  7. James D. Hamilton & Oscar Jorda, 2002. "A Model of the Federal Funds Rate Target," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1135-1167, October. [Downloadable!] (restricted)
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