Bloomberg News

Fed Plans Bank Guidance in Event Aug. 2 Deadline Missed

July 29, 2011

(Updates with Fed quote in second paragraph. For a special report on the debt debate, see {EXT6 <GO>})

July 29 (Bloomberg) -- The Federal Reserve is readying guidance for banks in the event the U.S. debt limit isn’t raised and the Treasury Department runs out of money to pay all of its bills, a Fed official said.

“As part of prudent contingency planning and in response to questions from the industry, the Federal Reserve is working with other bank regulators to prepare guidance for financial institutions,” Fed spokeswoman Barbara Hagenbaugh said today in Washington.

The guidance would cover issues including how banks would handle government payments, such as cashing customer’s Social Security checks. It also would address collateral pledged for loans as well as other supervisory and regulatory matters, said government officials who asked not to be identified because congressional negotiations on the debt limit are still under way.

A credit-rating downgrade of U.S. Treasury securities caused by a failure to lift the $14.3 trillion debt ceiling would affect collateral pledged for loans.

The stalemate, if it extends past the Aug. 2 deadline, would probably create turmoil in financial markets, which could cause banks and other companies to hoard cash, William Poole, former president of the Federal Reserve Bank of St. Louis, said in an interview. If that happens, the Fed has the power to create new facilities to provide short-term funds to banks and other financial institutions, he said.

“The Fed could open the liquidity spigot,” Poole said.

Hoarding Cash

MetLife Inc., the largest U.S. life insurance company, is hoarding cash as the debt deadline draws closer, officials said today. “We’ve added several billion dollars of excess cash, which we think is a prudent thing to do in an environment of uncertainty,” Steven Goulart, MetLife’s chief investment officer, said in a conference call with analysts.

Treasuries rallied on speculation lawmakers will break a deadlock over raising the debt limit, sending 10-year yields to the lowest since November. The 10-year yield dropped 17 basis points, or 0.17 percentage point, to 2.78 percent at 3:25 p.m. in New York, according to Bloomberg Bond Trader prices.

The U.S. Treasury Department met with bond dealers in New York today to discuss next month’s quarterly auctions of notes and bonds and the debt ceiling.

The Treasury canceled its regularly scheduled individual meetings with bond dealers in favor of the group meeting, according a statement from the Treasury Department. The meeting at the Federal Reserve Bank of New York’s headquarters in downtown Manhattan was for “all primary dealers,” according to the Treasury’s statement.

‘General Consensus’

“There was a general consensus among all participants that Congress should act as quickly as possible to raise the debt ceiling for as long a period as possible to lift the cloud of uncertainty from the economy,” the statement said.

Treasury Secretary Timothy F. Geithner has said the U.S. will lose its authority to borrow on Aug. 2, meaning it won’t have the cash to pay all of its bills. The Treasury is working on a plan to decide who gets paid and who doesn’t.

--Editors: Kevin Costelloe, Christopher Wellisz

To contact the reporter on this story: Jeannine Aversa in Washington at javersa@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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