Terrorist attacks paralyze markets
By JOHN PARTRIDGE and CAROLINE ALPHONSO, The Globe and Mail
Wednesday, September 12, 2001
Central banks quickly move into action, pledge support to avert gridlock in system
Central banks moved swiftly Tuesday to try to avert the danger of financial gridlock as the biggest financial intersection in the world seized up following the destruction of New York's World Trade Center by hijacked aircraft.
The Bank of Canada, the U.S. Federal Reserve Bank, the European Central Bank, the Bank of Japan and other monetary authorities all pledged to provide sufficient funds to keep payments systems flowing and markets operating.
In a statement issued more than seven hours after the cataclysmic events in the United States, the Bank of Canada said it “will provide the liquidity necessary to support the stability of the Canadian financial system and the continued functioning of financial markets.”
As well, Canada's bank regulator, the Office of the Superintendent of Financial Institutions (OSFI), said it is keeping close tabs on developments. “We are in contact with federally regulated financial institutions and are generally monitoring the situation,” an OSFI official said.
Stock markets abroad reeled after terrorist attacks in which planes crashed into both towers of the WTC, as well as into the Pentagon in Washington.
Neither the New York Stock Exchange nor the Nasdaq Stock Market opened Tuesday, and the NYSE said late in the day that U.S. financial markets would remain closed Wednesday. Closer to home, the Toronto Stock Exchange shut down at 10:40 a.m., 10 minutes after the CDNX. TSE officials said they would meet Wednesday at 6:30 a.m. to decide whether to reopen the market.
Wire service reports out of London predicted that the Dow Jones industrial average could be set for a drop of 400 points - 4.2 per cent - after trading in U.S. equities reopens, citing prices quoted late Tuesday on the Web site of British spread-betting firm IG Index PLC.
Japanese financial regulators were reported to be setting up crisis management headquarters to cope with potential disruptions, while Reuters, quoting an unnamed U.S. government official, reported that key U.S. regulators were talking with each other in an effort to assess the damage done by the attack on the WTC. “The interagency working group, consisting of the Treasury, the [Federal Reserve Board], the [Securities and Exchange Commission] and the [Commodity Futures Trading Commission], has been in constant communication Wednesday to assess the situation,” the official said.
However, the Swiss-based Bank for International Settlements, the umbrella regulator for the world's banks, declined to comment on the effect to money flow around the world now that a key nerve centre has been shut down.
Neither the Bank of Canada nor OSFI would provide any further details of the actions they are taking to prevent damage from the events in the United States flowing back along the financial pipelines that connect Canada and the United States.
Harry Ort, who heads the banking and financing practice at KPMG LLP in Toronto, said the issue for central banks is to make sure that delays in payments between financial institutions caused by the catastrophe do not lead to any lender going into default.
All major financial institutions are meant to have back-up systems and contingency plans for such crises, and at least in theory, should be able to divert payment flows that normally would go through New York to other routes, Mr. Ort said. Tuesday's events, he added, will provide “a real good test of all that.”
Former Bank of Canada governor John Crow compared the situation with the 1987 stock market crash. At that point, he recalled in an interview Tuesday, “We called all the banks and said that we were putting a lot of liquidity into the system, and that if there wasn't enough, we'll put in more,” he said.
The key, he said, is to avoid financial gridlock, “where people can't receive payments and therefore are not prepared to make payments. The whole thing can pile up and everybody gets frozen.”
At that point, he said, central banks must step in “blow the whistle and stop people from piling on.”
One observer said the massive amount of time and expense financial institutions and regulators in Canada, the United States and elsewhere put into preparing for the Y2K crisis that never materialized have left them in good shape to meet any problems that arise this time around.
Regulators, he said by way of example, looked closely to make sure banks and other financial companies have off-site locations for data processing and records back-up. “The major institutions certainly do, so my first instinct is that they would be well-equipped to survive the turbulence [and] mitigate a lot of the potential damage.”
However, he added that it will take a few days before this is known for sure.
Canadian Bankers Association president Raymond Protti said he anticipates no problems for the payments system as a result of the events in New York. “New York is obviously a critical centre for the financial services industry, but you have to remember that it's only one of a great number of them,” he said. As well, the U.S. Federal Reserve system has systems and contingency plans to “handle issues of this sort.”
Mr. Protti also said that with the exception of the shutdown Tuesday of about half a dozen branches in the bank towers in the downtown core of Toronto's financial district, the Canadian banking system remains “totally and completely operational.”
Bernard Wolf, professor of economics and international business at York University's Schulich school of business, said that although financial institutions in New York have been “crippled,” this is only temporary. They will be able to function again because of back-up systems, Mr. Wolf said. “However, it's not going to be the same by any means.”
If liquidity problems arise, he said, the U.S. Fed may pump more money into the system. “It's kind of like the human body that tries to find different ways to move the blood.”
Mr. Wolf said centres such as London will see more activity as investors move into less risky markets. “You want to get into major liquid currencies rather than into relatively minor illiquid ones,” he said.
Lew Johnson, professor of finance at Queen's University, said the companies that were tenants in the WTC started toughening up their back-up facilities after it was bombed by terrorists in 1993. Tuesday's catastrophe, he said, should not damage the flow of money, although the directions in which it flows “should be very interesting.”
Susan Christoffersen, assistant finance professor at Montreal's McGill University, concurred saying the events will likely “have more of an impact, I think, for Americans than on a global level.
“There's obviously going to be some breaks, and there's going to be some problems,” she said, but she does not think it will become a full-blown “financial crisis.”