September 11 at the Federal Reserve Bank
I really appreciate this opportunity to participate in the annual meeting of the Maine Association of Community Bankers. Of course, when we worked together to arrange for me to speak with you this morning, it was months ago, and our world seems so drastically different since September 11. None of us has had nearly sufficient time to absorb and understand what happened to our nation just ten days ago. Among other very important considerations, none of us really can say with any specificity how the events of that day and their ongoing aftermath will affect the national economy. Chairman Greenspan testified to that effect to the Congress yesterday.
Today, I thought it might be of interest to you for me to explain some of the measures taken by the Federal Reserve Bank of Boston and by the Federal Reserve System on September 11 and immediately thereafter. The Federal Reserve, and banking institutions such as yours, played essential roles in keeping large problems from becoming much larger still, and in helping to maintain public calm during a very stressful period. Let me discuss with you briefly what we did to protect our people and facilities; to keep vital operations and services going; and to provide sufficient liquidity to help financial markets to function.
Most of you know that the Federal Reserve Bank of Boston occupies a high-rise building which is very close to the airport in Boston. After the two planes crashed into the World Trade Center towers in New York, the news reports told all of us that the planes had originated from the Boston airport. These developments contributed to very high levels of anxiety in the City of Boston, and especially in office towers, including ours. To add to the anxiety, numerous false rumors were coming to us, about explosions in Boston which in fact had not happened, and about attacks on office towers in other cities, which also had not happened. Most businesses in the financial and “downtown” districts of Boston seemed to close early and send people home during the morning. In fact, most of the tenant organizations which occupy the major portion of our tower were sending people home. Many of us wanted to go home too. However, we knew that we had important work to do. Our job was to keep essential Federal Reserve services going, and help the banking system to keep its services going, so that consumers and businesses would not be even more disrupted and frightened.
Shortly after the second plane hit the World Trade Center, we took measures to protect our people and our facilities. We suspended all access by vehicles to our building. We installed at our entrances metal detectors and x-ray machines so that any people entering the building and anything they carried would be tested. We had prepared hookups for these devices previously, and our terrific staff had them installed and operational within twenty-two minutes after receiving word to implement them. We asked our staff who work on higher floors to relocate to the low-rise section of the building, which has four floors above ground and additional space below ground.
Our working conditions were very hectic for awhile. We were trying to determine what we needed to do locally to maintain essential operations. Simultaneously, we were participating in numerous conference calls involving management at multiple levels from all twelve Reserve Banks and the Board of Governors, to understand what was happening in each region of the country and work together to keep national payment services and other essential activities in operation. We also wanted to allow many of our people to leave Boston and go to their homes, and it took some time to sort out where we could operate without staff, where we needed to keep staff with us, and where we needed help from additional staff to shore up essential activities.
Thanks to the Bank's great people, we managed to remain open and keep all of our essential operations intact. As the day went on, we began to see where we had opportunities to avoid disruptions in the New England and national payments systems by taking some initiatives. I mentioned that we had suspended all vehicular access to our building during the morning. Within a couple of hours of doing so, we began to hear expressions of concern from some banks about obtaining adequate supplies of cash from us. When armored carriers could not come into our building, they also could not leave our building with new supplies of currency. Some banks had an immediate concern that if this restriction remained in effect for even a day or two, they might not have sufficient cash to stock ATM machines for customers and make cash available to businesses. When we realized that this initiative we had taken to protect our people and facilities could have immediate adverse effects, we worked with our Protection Department to establish the capability to inspect armored vehicles before they entered the cash facility, and then, upon successful inspection, to allow them to enter. We sent a broadcast message electronically to the depository institutions of New England to advise them that deliveries and shipments of cash had resumed, and we would be providing cash services as usual. We believe this quick modification helped to avoid any cash shortages, or even any concerns about cash shortages, in New England.
As you know, the government suspended all air transportation immediately after the attacks on the World Trade Center. Among other effects, this meant that many checks could not be collected, because the Reserve Banks and correspondent banks use air transportation to collect checks which must travel beyond certain distances to reach the paying banks. We in Boston, and the Federal Reserve nationally, anticipated that delays in check collection, which could have lasted for an indefinite period, could have disrupted life for consumers and businesses. If banks knew that they could not collect checks, and had no sense of when normal collection might resume, some banks might have discouraged deposits of checks from their customers. In turn, this might have discouraged some merchants from accepting check payments. People who received paychecks might not have been able to cash them.
With this concern in mind, the Federal Reserve Banks announced that they would continue to accept checks as usual, including checks from banks which did not normally deposit with the Federal Reserve, and would pass credit according to normal availability schedules. We knew that we would not be able to collect many of these checks, but we passed credit anyway, and absorbed the float, so that the check payment system would not be disrupted, and consumers and businesses would not be subjected to the risks of a broken check collection system.
One of the operations we provide in Boston for depository institutions in about half of the United States is what we call offline funds and securities transfer. While most Fedwire Funds Transfers and Book Entry Securities Transfers are completed electronically, through computer connections or through our Fedline connections, some institutions, particularly very small institutions with relatively few transfers to do, prefer to execute their transfers “offline”, by telephoning us with their transfer order and then having us call them back to verify their order. A few years ago the Reserve Banks consolidated these offline operations from twelve to two Banks, including Boston. The half of the country we cover includes New York.
On September 11, and for most of the rest of that week, our offline service provided a vital backstop for some of the largest banks in the country, when they had difficulty executing funds and securities transfers electronically with their contingency facilities. Our people in Boston worked long into the night throughout last week to transfer tens of billions of dollars through this offline service for large institutions, which probably never used the service previously. It was slow, but it worked, and our ability to use this operation, designed for the smallest banks, as a lifeline for some of the largest banks, helped to keep the national payments and financial system in effective operation.
I would like to point to the automated clearing house, or ACH, as an example of a vitally important payment mechanism which operated smoothly throughout this stressful period, but could not have done so without the conscientious responses of banks, such as yours, and the Federal Reserve to the tragic events. More than half of American workers get paid through ACH Direct Deposit. This mechanism worked without a hitch on and after September 11. However, if banks had chosen to close rather than remain open throughout the period, the ACH system would not have worked, and millions of Americans would not have received the wages and salaries on which they depend to live, and to feed their families. The ACH is one illustration among others of the vital support provided without interruption because the banking system remained in operation when other facets of the financial system were not able to do so.
The Federal Reserve System also was highly attentive and active in multiple ways to try to ensure adequate levels of liquidity in financial markets, so that markets would not freeze in response to the unavoidable disruptions that had occurred, such as the closing of the stock markets. The Reserve Banks were very active and accommodating lenders at the discount window, to help banks with funding shortages occasioned by disruptions, such as in the overnight federal funds market, which was not operating normally because so many participating firms were not in operation. On evenings when normally we might have lent a few hundred million dollars at the discount windows of all Reserve Banks combined, we lent amounts above twenty and thirty billion dollars. These loans all were with collateral, but their order of magnitude gives you some sense of how we stepped up to meet unexpected, urgent needs at many banks across the country. The check float we absorbed also had the effect of adding liquidity to the banking system.
To support the functioning of financial markets internationally as well as in the United States, the Federal Reserve entered into currency swap arrangements with other central banks. These included an arrangement to make fifty billion dollars available to the European Central Bank; thirty billion dollars to the Bank of England; and ten billion dollars to the Bank of Canada. In these arrangements the Federal Reserve received equivalent deposits of other currencies. The currency swaps ensured that sufficient liquidity in U.S. dollars would exist in international financial markets.
The Federal Reserve has taken other actions as well to contribute to financial stability during this difficult time. Most notably, of course, the Federal Open Market Committee decided on September 17 to lower its target for the Federal Funds Rate by fifty basis points, to three percent. In announcing this move, the FOMC also made a point of stating that the Federal Reserve will continue to supply unusually large volumes of liquidity to the financial markets, as needed, until more normal market functioning is restored. As of today, we hope we are at or close to that normal market functioning, but be assured that the Federal Reserve remains highly attentive to doing whatever must be done to protect the financial system and assist its effective operation.
We have not had much time and space to reflect on what we all have been doing for the past ten days. When we have some such opportunity, no doubt we will find ways in which we could have done better, and lessons we can apply to our preparations for disruptions in the future, although we pray that we never again will see events such as we experienced on September 11. All of us always can do better.
We should take a moment this morning, however, to realize all that we have accomplished together. The banking system of the United States provided a solid rock upon which financial markets could lean, and American consumers and businesses could depend. You kept going, and we kept going. That was very important for the people of your communities in Maine, the people of New England, and the nation. Thank you for all that you have done.