Liquidity Effects of the Events of September 11, 2001

21 Pages Posted: 21 Sep 2005

See all articles by James McAndrews

James McAndrews

Wharton Financial Institutions Center

Simon Potter

Peter G. Peterson Institute for International Economics

Abstract

Banks rely heavily on incoming payments from other banks to fund their own payments. The terrorist attacks of September 11, 2001, destroyed facilities in Lower Manhattan, leaving some banks unable to send payments through the Federal Reserve's Fedwire payments system. As a result, many banks received fewer payments than expected, causing unexpected shortfalls in banks' liquidity. These disruptions also made it harder for banks to redistribute balances across the banking system in a timely manner. In this article, the authors measure the payments responses of banks to the receipt of payments from other banks, both under normal circumstances and during the days following the attacks. Their analysis suggests that the significant injections of liquidity by the Federal Reserve, first through the discount window and later through open market operations, were important in allowing banks to reestablish their normal patterns of payments coordination.

Keywords: liquidity, lender of last resort, discount window, coordination, payments, central bank

JEL Classification: E58, E41, G21

Suggested Citation

McAndrews, James and Potter, Simon, Liquidity Effects of the Events of September 11, 2001. Economic Policy Review, Vol. 8, No. 2, November 2002, Available at SSRN: https://ssrn.com/abstract=803387

James McAndrews (Contact Author)

Wharton Financial Institutions Center ( email )

2306 Steinberg Hall-Dietrich Hall
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19104 (Fax)

Simon Potter

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

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