United States: New York Clearing House Association, The Panic of 1890

Before the advent of the Federal Reserve System, private clearinghouses provided emergency liquidity support to the banking system during panics. The most notable of these institutions, the New York Clearing House Association (NYCH), supported its member banks by issuing clearinghouse loan certificates (CLCs), short-term collateralized loans guaranteed by the NYCH, as an alternative liquidity source during banking panics; member banks used CLCs exclusively for the purpose of temporarily settling payments with other NYCH members. During the Panic of 1890, the NYCH issued $16.65 million of CLCs between November 12 and December 22, 1890. The Loan Committee received requests from and authorized CLC issuance to member banks with corresponding collateral pledges, which were subject to a minimum 25% haircut. The NYCH required borrowing banks to pay out 6% interest to accepting banks--other members that received the CLCs in place of cash settlements--as well as a 0.25% monthly commission fee. A borrowing bank could redeem the CLC and then petition the Loan Committee to retire the loan, ending interest payments and receiving back its collateral. The CLCs, which peaked at $15.21 million outstanding on December 12, 1890, were all redeemed by February 7, 1891. With the help of substantial liquidity from the Treasury and the bailout of troubled banks by two banking syndicates, the NYCH liquidity support via CLCs contained the panic, and ultimately, only a small number of banks failed. Unlike several other crises in the National Banking Era (1863-1913), New York banks did not temporarily suspend payments to depositors.