Fed to Arrange Loans for Banks To Alleviate Y2K-Glitch Pressures By a WALL STREET JOURNAL Staff Reporter

WASHINGTON -- The Federal Reserve is planning a special program to lend money to banks that may need emergency credit to cope with possible consumer and business demand generated by fears of the year-2000 computer glitch.

"The Federal Reserve Board expects that, with advance planning, depository institutions will be able to meet their liquidity needs during the century data change period relying on their usual sources of funds," the Fed said. "The Board recognizes, however, that uncertainty surrounds potential developments over the period." The so-called Y2K problem stems from some computers' inability to handle the transition from 1999 to 2000.

The Fed is proposing to create a "special liquidity facility" for loans to eligible financial institutions from Nov. 1, 1999, through April 7, 2000. The Fed plans to charge an interest rate of 1.5 percentage points above the Fed's then-current target for the federal funds interest rate. The fed funds rate, which is strongly influenced by the Fed's sale and purchase of government securities, is the rate banks charge each other for overnight loans.

The Fed said it wants the rate high enough to encourage banks to make private-sector arrangements, but low enough "to provide a reasonable backstop."

The Fed's current target for the federal-funds rate is 4.75%. The Fed charges 4.5% on loans it makes directly to banks from what is known as the discount window. Banks are supposed to use the discount window only when they have exhausted alternative sources of liquidity; that rule wouldn't apply to the year-2000 window.

Credit unions will be eligible for loans from the Fed's Y2K-window as well.

Fed Chairman Alan Greenspan this week expressed confidence that the U.S. banking system will withstand Y2K pressures. "As far as we can judge, there are not going to be significant problems in the American banking system," he said.

-- Cliff (cheers@polly.com), May 27, 1999

Answers

Cliff,

Also see this thread...

http://www.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=000rvv

"Credit Unions in U.S. to get Y2K Liquidity Boost"

There is some heavy-duty contingency planning going on as we speak.

-- Kevin (mixesmusic@worldnet.att.net), May 27, 1999.

Yeah, the trillion dollar bump in the road.

-- Mike Lang (webflier@erols.com), May 27, 1999.