US considers formation of ‘dormant bank’

The Federal Reserve Board of Governors has convened a group of banking experts to consider the formation of a dormant bank "that would be available for activation, if necessary, to clear and settle US government securities." The 9/11 World Trade Center attacks revealed systemic risks in wholesale clearance and settlement functions.

The Federal Reserve has announced two specific requests.

* First, the Federal Reserve, joined by the Securities and Exchange Commission and the Office of the Comptroller of the Currency, is asking the working group to consider formation of "NewBank," an entity that would provide the same services offered by the nation's two clearing institutions.

* Second, The banking regulators are asking the new working group to carefully address implementation challenges. "Once those challenges have been successfully addressed," the Federal Reserve reports, "those that have agreed to own NewBank should take the necessary steps to implement the concept." The Board asked the working group to prepare a report by late this year that summarises its progress, identifies the remaining challenges that need to be addressed before a charter application can be submitted, and sets out a timetable for meeting those remaining challenges.

The US financial services community has developed some of the most sophisticated risk management practices since the 9/11 attacks to enhance infrastructure resilience. In addition to consideration of a dormant entity, financial institutions that provide payment, clearance, settlement, and trade functions have deployed an array of "sound practices." These include identifying the most critical financial services and the infrastructure necessary to provide those services; establishing robust back-up facilities to resume operations in set periods of time; and maintaining geographically dispersed resources to meet recovery and resumption objectives.

Industry and government have been studying the resilience of wholesale banking activities since 9/11. The attacks exposed serious operational vulnerabilities, including the concentration of risks created by dependence on two banking institutions, the Bank of New York and JP Morgan Chase. These financial institutions constitute the nation's principal resource for wholesale clearing services. Clearing and settlement involve a comparison of trade details, such as price and terms, and an exchange of payments.

Last week's Federal Reserve announcement is based on recommendations by the Working Group on Government Securities Clearance and Settlement, which issued detailed recommendations last month to manage risks to the nation's key banking functions. Their recommendations include not only formation of a dormant financial entity, the focus of the new working group, but also deployment of a resilient telecommunications infrastructure and a more rigorous focus on cyber-terrorism.

Source: Zeichner Risk Assessment Newsletter. To subscribe to this weekly newsletter, click here.

•Date: 4th February 2004 •Region: N.America •Type: Article •Topic: Financial sector
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