Alan Greenspan: The September 11 tragedy and the response of the financial
industry
Remarks by Mr Alan Greenspan, Chairman of the Board of Governors of the US Federal Reserve
System, at the American Bankers Association's Virtual Annual Convention (taped statement),
23 October 2001.
* * *
I am pleased to speak once again to an American Bankers Association convention. This conference
was rescheduled in respect for the loss of our colleagues and fellow citizens in the tragedy of
September 11. But the fact that the conference is going forward in cyberspace is a testimony to
American perseverance, to our technology, and to our flexibility. It is a metaphor for the ability of our
economy to circumvent difficulties and innovate around obstacles and--most of all--for our
decentralized and diversified economic structure.
Our financial system has exactly such a structure. It still has thousands of banks, with hundreds of
foreign competitors, including some of the largest banks in the world. In addition, market
developments, regulatory relief, and, most recently, legislative reform have ensured that the banks, the
insurance companies, the securities firms, the finance companies, and the host of other participants,
from pension funds to hedge funds and from trusts to mutual funds, are all, in effect, in each other's
business. And this listing does not even take into account a capital market where lenders and
borrowers deal directly and where increasingly the instruments and risks originated by financial
intermediaries come to rest.
These activities could be done much more efficiently in a technology sense by far fewer entities, but
our seemingly crazy quilt structure creates a different kind of efficiency--one that emphasizes constant
cost minimization, innovation, and flexibility. And that is exactly what we saw a couple of weeks ago,
when literally within hours of the attack on the World Trade Center--with many of the participants still
grieving and with the loss of extraordinary personnel and resources--our financial system was finding
ways to return to operation.
Some examples will clarify this creativity of our system. With borrowers and lenders uncertain whether
the financial markets were open and with communications among issuers, their banks, and the
settlement system impaired, there were difficulties in rolling over maturing commercial paper. The
resulting shortfalls in the coverage of billions of dollars of maturing paper were managed by rolling fails
into the next day's settlement or by drawing on bank lines, causing bank assets to balloon for a few
days. Similarly, disruptions in the connectivity of communication lines and the shift to backup sites
caused delays in payments and settlements, with billions in funds building up at a small number of
participants unable to send out funds covered by similar amounts of Federal Reserve open market
operations, overdrafts, and loans to those who could not receive. To facilitate the channeling of dollar
liquidity to foreign financial institutions operating in the United States and to meet all appropriate
demands for dollar liquidity, thirty-day currency swap lines were arranged with major central banks,
again in record volume. Fed and bank balance sheets ballooned with the maldistribution of reserves,
and domestic and foreign operations, but there was no fear of either credit or liquidity risk. Fed funds
borrowers and lenders, forced to deal directly because brokers were temporarily unavailable, quickly
reached agreements to trade at the targeted federal funds rate. Similarly, in response to losses of
personnel and equipment at some participants, dealers agreed voluntarily to extend settlement in the
Treasury market to T+5. Crucially, lenders--banks in particular--stepped up to meet their
commitments, real and implied, to avoid the disruptions that were a large part of the terrorists'
objective.
The list of adjustments and innovations goes on and on. But the point is clear that we are blessed with
a financial system that is creative, that is flexible, that is innovative. Banks--including the central
bank-were there when they were needed and did what was required with dispatch. We should be proud of
the banking system's role in minimizing the economic fallout of that tragic day.