Fed makes $50 billion available to support European banks in wake of terrorist attacks

Published 9:00 pm Wednesday, September 12, 2001

Associated Press

WASHINGTON – The Federal Reserve said Thursday it was making $50 billion available to stabilize the operations of European banks in the United States. It also announced that because of the terrorist attack it was moving its New York operations to New Jersey.

The Fed said it was providing up to $50 billion “to facilitate the functioning of financial markets and provide liquidity in dollars,” supplying dollars to the subsidiaries of European banks operating in the United States.

Private economists said the unusual move could be an indication that the terrorist attack at the World Trade Center on Tuesday was having a significant impact on financial operations in New York, a major operating point for the world’s largest banks.

Steve Barrow, a currency strategist in London, said the Fed’s move could indicate that U.S. banks in New York were having trouble performing their normal function of providing dollars to European operations and “the Fed’s plugging the gap.”

The Fed also announced Thursday that it was temporarily moving operations of the New York Federal Reserve, which performs the key operations involved in implementing the Fed’s interest rate decisions, to a branch location in East Rutherford, N.J.

A Fed official said the relocation decision was made because of the logistical problems of getting to the New York offices, which are located only blocks from the destroyed World Trade Center.

The Fed’s decision to make the $50 billion available to European banks followed by one day a joint statement from the world’s seven richest countries pledging that their central banks would coordinate activities to make sure emergency withdrawals did not destabilize any of their banking systems.

The Fed’s action Thursday appeared to be an effort to demonstrate strongly to financial markets that the United States was prepared to back up the G-7 pledge of support with hard cash where necessary.

The money will be provided in a swap arrangement with the European Central Bank, the overall central bank for the 12 European countries that have adopted the euro as their common currency. The Fed will make up to $50 billion available to be deposited in ECB accounts at the New York Fed and the ECB will deposit an equivalent amount of euros, Europe’s new currency, at the Fed’s New York regional bank.

The Fed’s three-paragraph announcement did not explain how the figure of $50 billion was arrived at, but private economists said the action indicated the Fed was worried about disruptions to normal bank operations in the wake of the terrorist attack.

“A number of foreign financial institutions may be having difficulty transferring funds from their U.S. operations to European operations,” said Mark Zandi, chief economist at Economy.com, a private forecasting firm. “The Fed is providing this money to ensure that the whole payments process doesn’t shut down.”

The Fed made its announcement after the ECB said in Frankfurt, Germany, that it had decided to keep its main interest rate unchanged at 4.25 percent as it waited to see how the terrorist attacks in the United States affected the global economy.

The Fed announcement was one a series of U.S. moves to shore up confidence in financial markets following Tuesday’s attack. The assault leveled the World Trade Center, grounded the U.S. aviation system and forced the longest suspension of trading on the New York Stock Exchange since the Great Depression. Officials said stock trading will not reopen until Friday at the earliest.

The president’s working group on financial markets – an interagency group that convenes during periods of market turmoil – has been closely monitoring global developments and working with officials of the major stock exchanges in New York to provide support for reopening trading.

Both Federal Reserve Chairman Alan Greenspan and Treasury Secretary Paul O’Neill returned to Washington Wednesday from overseas trips.

In its joint statement Wednesday, the G-7 countries – the United States, Japan, Germany, France, Britain, Italy and Canada – said they were “committed to ensuring that this tragedy will not be compounded by disruption to the global economy.”

The Fed had announced hours after the bombing on Tuesday that it was supplying additional money to the U.S. banking system and officials said there had been a substantially elevated demand for direct Fed loans to commercial banks this week.

Private economists predicted the Fed’s efforts to supply additional money to banks would soon be followed by further interest rate cuts, possibly before the next Fed meeting on Oct. 2.

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