Did the Fed Pass? The FAA grounding of all flights on Sept. 11 added an unimaginable dimension to disaster scenarios and could have crippled the nation's payments system. Thanks to contingency planning and a strong network of vendor partnerships, the Federal Reserve overcame this obstacle and kept the payments system running—not always on deadline, but effectively nonetheless. Looking back, the Fed must now evaluate its overall response. Here are some things we learned.
As expected, electronic payments operated smoothly. Unlike the Y2K scare, it was the lack of air transportation that impaired the payments system, as every weeknight the Fed relies on this system to move about 43,000 pounds of checks among the 45 Fed processing sites. Aside from the physical disruption, the lag posed settlement and float issues for banks nationwide.
In this respect, the Fed responded quickly. By early afternoon on Sept. 11, ground transportation was organized for the evening—the Fed dispatched several hundred check-filled trucks, via ground hub and spoke network. On that and the following nights, the Fed delivered about 75 percent of its normal volume by truck.
Meanwhile, the Fed worked closely with the FAA and the U.S. Air Force to resume flight of courier planes, and by late Wednesday, these jets returned to the air, even though commercial airports were not yet open. On Thursday, the Fed began working with various check transportation vendors, and through the weekend patched together a network of Fed and charter flights that represented what one Fed employee described as a "whirlwind of improvisation."
And then there were the liquidity and credit issues. (See Feditorial) As lender of last resort, the Fed's discount window not only remained open late, but loans Sept. 12 rose to $45.5 billion, up from $99 million the Wednesday before. The Fed absorbed billions of dollars of float during the two days that it continued to provide credit to depositing banks on money that had not yet been collected. Some banks also reported increased demands for currency, which were honored to maintain public confidence.
Despite our success at providing liquidity, we underestimated the urgency of sending a reassuring message to the public. Should a crisis strike again, banks and the public will not want to wait four hours for official confirmation that the Federal Reserve is up and running, and that the discount window is open.
As we were reminded on Sept. 11, we can never "over test" a contingency plan. And each crisis presents an opportunity to learn and improve. What lessons will the Fed and the banking industry take away? Here are some considerations we may all want to revisit:
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Fed in Print: An index of the economic research conducted by the Fed.