September 11 and the U.S. Payment System

• Author: Christine M. Cumming
• Position: Executive Vice President and Director of Research of the Federal Reserve Bank of New York

What lessons can we draw from September 11 to help us safeguard the financial system against possible future disasters?

The events of September 11 posed unprecedented challenges to the operation of the dollar payment system in New York. In its broadest definition, the payment system is a network of banks, central banks, securities firms, service providers, and industry-owned utilities that ensures both the smooth transfer of funds for business and financial transactions and the timely settlement of securities transactions. At its core are the two principal wholesale payment systems, Fedwire and CHIPS (the Clearing House Inter-Bank Payments System), their bank participants, the government securities settlement systems operated by the U.S. Federal Reserve System and two principal clearing banks, and the clearing and settlement organizations for corporate and other securities. For its liquidity and risk management, as well as its transaction flow, the payment system depends on well-functioning financial markets and an extensive communications network.

The World Trade Center, one of the targets of the September 11 attacks, housed several wholesale brokers and large trading operations that play essential roles in the financial markets. Some firms suffered devastating losses of employees. In addition, the communications network and the primary operations of many payment services providers near the World Trade Center were disrupted as fire, debris, and water destroyed or damaged much of the power, telecommunications, and transportation infrastructure serving lower Manhattan's financial district. Workers in the vicinity of the World Trade Center were forced to evacuate their buildings immediately after the attacks occurred. Others followed as the day progressed, as city officials limited access to lower Manhattan to rescue, emergency, and security personnel.

Given the scale of death and destruction, the dollar payment system performed well in the wake of the attack. Fedwire and CHIPS operated throughout September 11 and the days that followed, in part because significant parts of their operations were not located in downtown New York. Crucial elements of the clearing and settlement system for U.S. government securities, especially the Bank of New York, labored under severe difficulties for some time, but trading in government securities was able to resume on September 13. Redemptions and rollovers of commercial paper were temporarily disrupted, but equities trades made in the days just before September 11 were fully processed and settled. By September 17, when the major U.S. stock exchanges reopened, payments and securities settlements were able to accommodate the largest volume of trading that had ever occurred in a single day in New York Stock Exchange history.

The ability of the largely electronic U.S. wholesale payment system to withstand the direct and indirect damage of September 11 is especially noteworthy in light of the system's complex structure. How was the payment system able to weather and recover from such a massive attack? September 11 and earlier disasters like fires, storms, and power losses have revealed that there are three crucial elements in preventing gridlock in the financial system.

Contingency planning

Contingency planning and built-in redundancy in operational capacity have long been important elements of business strategy at financial institutions. Two key goals are the ability to promptly resume business activity and the safeguarding of transactions and financial information.

While traditional contingency planning seeks to minimize the time between a disruption of business operations...