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October 4, 2013 12:22 am
US banks have been stocking cash machines with extra funds to satisfy any consumer panic in the days before a possible default.
Three of the country’s top-10 banks said they were putting into place a “playbook” last used in August 2011 when the government last came close to breaching the debt ceiling. A partial government shutdown began this week as Congress failed to agree on a spending bill.
Bank preparations for a debt default involve daily conference calls between lines of business to try to anticipate problems. One senior executive said his bank was delivering 20-30 per cent more cash than usual to cash machines in case panicked customers tried to withdraw funds en masse.
US deposits of up to $250,000 are guaranteed by the Federal Deposit Insurance Corporation but previous severe market disruption – notably during the financial crisis – led to significant withdrawals regardless of the government’s guarantee.
An employee of a second large bank said it was also increasing deliveries of cash. “Do you have cash on hand in your vault? That’s a consideration,” he said. A third top-10 institution declined to comment but said it typically increased stocks of cash in advance of disruptive events such as hurricanes.
The severity of the debt limit storm hinges on whether, and how quickly, Republicans and Democrats can end their paralysing stand-off before an October 17 deadline.
Banks are preparing contingency measures to deal with possible consumer panic, ranging from the increased cash in branches and in cash machines to temporary free overdrafts for government workers and those who rely on social security payments.
However, they are only temporary measures and a prolonged shutdown and default would have profound and uncertain effects, bankers said. “We can put these plans in place for about a month,” said the senior bank executive.
His bank and others are working to ensure that customers would be able to use their debit carts uninterrupted and with no fees even if they went into negative balances, though these would be capped at a few thousand dollars. “It will get us through one payment cycle at the cost of billions of dollars of risk to banks.”
Customer phone calls to banks were coming in from various people concerned about the ramifications of the government shutdown, including military personnel worried about making mortgage payments if their wages were stopped.
The effects ripple through businesses too, spreading far beyond the federal government to thousands of private contractors, some of them wholly reliant on government contracts.
Banks themselves have been bolstering their capital and liquidity levels since the financial crisis and the Federal Reserve has certified that they can survive a severe economic shock.
But that has not done away with nervousness on the part of the banks or planning for a spiralling of problems from the default. These include the potential for collateral calls from trading counterparties if banks themselves have their credit ratings downgraded in the wake of a sovereign default.
Rating agencies declined to comment on the likelihood of that happening. Moody’s has said that a one-notch downgrade of the US government would hit only Bank of New York Mellon, which it estimates has a “very high” degree of systemic support from the government.
In research published at the end of last year it said JPMorgan Chase would be downgraded by one notch in the event that the goverment’s rating was lowered by two and State Street and Wells Fargo would incur downgrades if the US was downgraded by three notches.
Credit ratings are particularly important for derivatives contracts. The largest US banks face collateral calls from derivatives counterparties stretching into the billions of dollars after downgrades.
Depending on the moves in US Treasury prices, banks which hold hundreds of billions of dollars of US debt may also take substantial paper losses, potentially depleting capital.
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