S&P says the financial markets appear to have fundamentally weathered the initial phase of the dislocations caused by the attacks on the World Trade Center. The payments system continued to work even in the immediate aftermath of the disaster, and financial markets are now all open for business.

Liquidity is plentiful, says S&P: banks channeled large amounts of liquidity borrowed at the discount window to those experiencing temporary payment delays in the settlement and other processes. Such temporary glitches have now all but disappeared. For the most part, banks and brokers have been able to transfer operations to locations outside the downtown area, benefiting from recent emergency planning that took place prior to the millennium period.

The agency says ratings considerations will focus not on the immediate and temporary impact of the World Trade Centre disaster, but on its medium to longer-term implications for banks. Investment banks could be especially vulnerable to the business interruption and potential impact of a further slowdown in already weak capital markets, believes S&P. Any aggressive share buybacks will further reduce the tolerance threshold for earnings pressures.

For those firms already on a negative outlook, such as Bear Stearns, Merrill Lynch, Goldman Sachs, Morgan Stanley, and Charles Schwab Corp., the earlier concerns expressed about the poor operating environment are likely to be exacerbated. Other firms that will be closely examined include: Credit Suisse Group, Lehman Brothers, Deutsche Bank AG, UBS AG, and E*TRADE Group.

Special mention was reserved for the Bank of New York, one of the biggest processors of securities trades, whose custody and payment systems suffered severe disruptions in the three days after the attack as it relocated from downtown Manahttan to suburban New York states and adjacent counties.