For Release: Nov. 27, 2001
Contacts: Joe Elstner, (314) 444-8902; Charles B. Henderson, (314) 444-8311

U.S. Payment System, Banks Performed Effectively after Attacks, Says St. Louis Fed's Poole

Link to speech

ST. LOUIS -- After the September 11 attacks, efforts of the Federal Reserve and the nation's financial institutions limited the degree of disruption of consumers' and businesses' ability to make and receive payments, according to William Poole, president of the Federal Reserve Bank of St. Louis.

Poole, speaking to a meeting of the Financial Executives International, said the vulnerability turned out to be the physical infrastructure of payments and trading systems and not the underlying strength of financial services firms. "These firms and their suppliers proved to have the capital and technical resources to restore damaged infrastructure," Poole said.

"Developments during the week after September 11 were especially important for limiting the impact of the attacks on the operation of our payment system and financial institutions," said Poole. "Some parts of the financial system did have their operations shut down by the collapse of the Twin Towers, but other parts of the system continued to function normally. The depth of operational resources, the capacity to call on backup systems and the role of the Federal Reserve in providing massive amounts of liquidity reflect the robustness of the U.S. financial system," he said.

Poole noted that electronic payment networks operated by the Federal Reserve System Fedwire and the automated clearinghouse worked without interruption. These systems, he said, enabled other parts of the payment system, such as credit card, debit card and ATM networks, to function well and financial institutions to settle transactions among themselves.

Poole said that operating the nation's check collection system was a particular challenge in the week after September 11. "Banks couldn't collect checks through air transport," he said. "So the Fed adopted a policy to minimize potential disruptions to using checks in transactions. The Reserve Banks accepted checks from banks for deposit to their reserve accounts as usual and credited those accounts for proceeds of the checks on the usual time schedule, with the Fed absorbing the "float." "Temporarily changing our policy let banks accept checks from customers and credit their accounts on the usual collection schedule," Poole said.

Poole also credited banks and bank regulators for helping the payment system through the crisis. "Bank capital ratios remain substantially higher than during problem periods of the late 80s and early 90s. Also, a factor that could have caused disruptions in payment arrangements would have been an unwillingness of banks to extend credit to each other. I'm not aware of evidence that this problem occurred," Poole said, adding that bank supervisory authorities have done well in keeping banks in sound financial condition.

Poole said the operation of the country's payment system and financial institutions after September 11 "gives us a basis for optimism about our nation's ability to cope with future events." He said this capacity rests on a continuing commitment to two principles: The Fed as the central bank must inject additional liquidity into the banking system temporarily during a financial crisis, and government supervisory agencies must maintain a commitment to policies that promote the strength of financial institutions. "This strength includes sound capital positions and robust contingency plans for maintaining or restoring operations," he said.

Poole also emphasized his optimism about the economy's future. "We have great strengths in our situation, and we are a resourceful people. Our economy is organized through competitive markets, and we're responding quickly to the new situation. Bank capital positions are strong and inflation remains low." As for a clear revival of economic growth, Poole said he believes it will happen "within a few calendar quarters. Of that, I'm confident."

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