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Fed explores creation of special-purpose crisis clearing bank

05 February 2004  |  2586 views  |  0 Fed explores creation of special-purpose crisis clearing bank

The Federal Reserve has established a private-sector working group to explore the creation of a dormant bank that would be available for activation to clear and settle US government securities during times of crisis.

The 'NewBank' concept was floated earlier this year by a working group on Government Securities Clearance and Settlement as a measure to help mitigate risks to the financial system from the failure of one of the two major clearing banks, JPMorgan Chase and Bank of New York. It is envisaged that NewBank would be ready for activation in the event that one of the clearers permanently exited the business, voluntarily or involuntarily, and no well-qualified bank stepped forward to purchase the exiting bank's clearing business.

The Fed has asked the new working group to flesh out the NewBank concept and address any challenges to implementing it.

"Once those challenges have been successfully addressed, those that have agreed to own NewBank should take the necessary steps to implement the concept, including obtaining a limited-purpose bank charter," says the Federal Reserve.

Michael Urkowitz, senior adviser to Deloitte Consulting, the chairman of the previous working group, has agreed to serve as chairman of the NewBank panel. The group will include senior representatives from JPMorgan and BoNY, the Fixed Income Clearing Corporation, The Bond Market Association, the Investment Company Institute, Cantor Fitzgerald Securities, Federated Investors, Fidelity Investments, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley, Salomon Smith Barney, State Street, and UBS.

They are expected to report back later this year.

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