Monday, March 27, 2006


'Emergency Facility' To Fill Banks 'Involuntary Exit'

A reader sent in this report from a Bond market trade group. "The Bond Market Association announced today that it has accepted an invitation by a private-sector working group established by the U.S. Federal Reserve Board to develop and lead the creation of a so-called 'NewBank,' a standby bank that would only be activated if one of two existing clearing banks in the U.S. government securities markets was suddenly forced to leave the business."

"Both government officials and market participants have long been concerned about the possibility, even if remote, of one of the banks suddenly exiting the markets and have agreed the NewBank concept is an appropriate precautionary measure."

"'The Bond Market Association is pleased to accept this important responsibility,' said Edward C. Forst, Chairman of the Bond Market Association and Chief Administrative Officer of Goldman Sachs & Co. 'The Association is well-positioned to bring together market participants and coordinate the implementation of this emergency facility.'"

"Since the mid-1990’s all of the major participants in the U.S. government securities markets have depended critically on one of two clearing banks, Bank of New York and J.P. Morgan Chase, to settle their trades and to facilitate financing of their securities inventory positions. Interruption of a clearing bank’s services has the potential to severely disrupt those markets, as was evident in the wake of the tragic events of 9/11."

"Further, the importance of the government securities markets to the U.S. and global economies cannot be overstated. Securities dealers are also increasingly dependent on tri-party repos for financing, with $1.9 trillion of securities now funded through this mechanism. 'Securities dealers need a contingency plan in the event one of the clearing banks is forced to exit the markets,' commented Micah S. Green, President and CEO of the Bond Market Association. 'Establishing NewBank is a prudent market-based initiative aimed at mitigating any potential problems caused by the sudden involuntary exit of one of the banks.'"

"The idea of a standby bank was first recommended by a private-sector working group established by the Federal Reserve in 2004. The bank would only be activated if a credit, legal or other problem caused market participants to lose confidence in an existing clearing bank, and no well-qualified bank immediately stepped forward to purchase the exiting bank’s clearing business. The standby bank is not designed to address resiliency problems such as those encountered after 9/11."

"The working group recommended the Association carry out the next phase of implementing NewBank because the Association has the relationships and the experience necessary to lead the effort. 'The Association has years of experience bringing market participants together to establish principles and practices leading to efficient, liquid markets,' said Mr. Green. 'We welcome this opportunity and are confident we can establish an effective contingency facility to mitigate the risks posed to the markets if one of the clearing banks is forced to exit.'"

maybe they'll get J.P. Morgan to head it!
from a CNN article.

"The Morgan empire even helped rescue the American banking system in 1907, when a panic prompted a run on bank deposits and turmoil on Wall Street. After that episode, in 1913 the government created the Federal Reserve, the nation's first true central bank."
I don't know about everyone else here, but this sudden approach of "Just in case our banking system melts down" sure brings out the gold bug in me. It would be one thing if such security measures had been put in place during a period of fiscal stability -- but putting them in place as storm clouds gather on the horizon? Looks to me like one more bad omen.
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