U.S. Banks Pack Vaults With Cash As Y2K Insurance

Updated 12:22 PM ET December 10, 1999

By Marjorie Olster

NEW YORK (Reuters) - U.S. banks are packing their vaults with spare cash in the final weeks of the millennium in case a public anxious over Y2K computer problems rushes to withdraw extra money around year-end, economists say.

Currency in circulation, at a record $589 billion on Dec. 8, has set new highs every week this quarter. And the Federal Reserve is taking extraordinary steps to make plenty of money easily available to banks and dealers in case they run into trouble during this period.

All of this has some economists concerned that money growth will fuel inflation down the road and may already be stimulating consumption and even the stock market.

But Fed officials and Fed-watchers who closely track the data say this is probably not the case. The increased demand for currency so far seems to be coming mainly from commercial banks and not from consumers padding their wallets. David Resler, chief economist at Nomura Securities International Inc., said the broadest measure of currency in circulation was up more than 15 percent in November versus a year ago, the fastest growth in at least 14 years. In the past nine weeks, it has been rising at the quickest pace in memory.

This surge, he said, is symptomatic of Y2K anxiety. "There is no question it is related to Y2K. There is no other reason for this kind of buildup of currency," Resler said.

"I think it is because banks fear a strong demand from the public for cash at year-end and I think the public may be building up some of the cash for year-end," he said.

There are lingering fears computers will fail on Jan. 1 if they mistake the year 2000 for 1900 because of outdated software that reads the year using only the final two digits.

But the government expects banks and the national infrastructure to make the transition with few hitches.

Conventional wisdom now says the only thing to fear is fear itself -- which could take the form of a public panic such as a run on banks or on gas stations.

The New York Fed, the central bank's operational arm in financial markets, sees little evidence consumers are stockpiling cash.

"So far we have not seen unusually elevated consumer demands for currency," New York Fed Executive Vice President Peter Fisher said last week.

"But ... we have seen elevated demands for currency from banks as a precaution against the risk of high consumer demand for notes," he added.

Resler, however, said Americans may be holding more cash in the run-up to New Year's Eve. That could simply be because a booming economy and stock market have left them flush just in time for the Christmas shopping season or because of the high prices of New Year's Eve celebrations.

Lou Crandall, chief economist at R.H. Wrightson & Associates in New York, said the swell of currency in circulation is due mainly to banks increasing vault cash.

"They are playing it safe, the banks. Thank God they are doing it," Crandall said. "There is no downside to having banks hold a lot of currency."

Surplus vault cash, which excludes cash banks hold to satisfy reserve requirements, rose 106 percent in November to $17.3 billion from $7.8 billion a year ago.

"The real explosion in currency was in the month of November. The numbers so far suggest most of that is on the books of commercial banks," said Crandall. "This has never been seen. Nothing like this has ever happened."

Anticipating greater domestic demand for currency in this period, the Fed ordered printing of $50 billion in extra cash.

Offering an unprecedented insurance policy to bond market dealers, the Fed also sold nearly $500 billion in options to conduct repurchase agreements on specific dates with the Fed at a premium of 150 basis points over the 5.5 percent target federal funds rate.

The options were meant to reassure bond market dealers there will be adequate liquidity in the transition period. The options do not add liquidity to the system unless they are exercised, which is seen as unlikely because of the premium.

Crandall predicted the armored car drivers who cart money between the Fed and the banks will be very busy come January as excess currency in bank vaults is shipped back to the central bank, provided no special problems arise.

As for consumers with spare cash, the big question is whether they will deposit it back into bank accounts or spend it freely, which could stimulate the economy early next year and heighten inflation worries in the markets.

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Ray

-- Ray (ray@totacc.com), December 10, 1999

Answers

Don't the bank realize that they could be ROBBED by keeping all that extra cash on hand.....

-- so (so@so.so), December 10, 1999.

So,

ROTFLMAO. I was just going to say that this is a good thing. Crandall is right, but it's nice to see that they are acknowledging Y2K as a potential problem. It's not all happy face here.

The disconnect for the banks is not the bank runs, but the uncertainty. We are ALL responding to the uncertainty.

-- nothere nothere (notherethere@hotmail.com), December 10, 1999.