Anticipating operational difficulties for the banking industry, the American Bankers Association has requested a delay of the Federal Reserve System's plan to extend the operating hours of the Fed Wire funds transfer service.

Fed Wire, a high-speed funds transfer network that links Federal Reserve banks, the U.S. Treasury, and Federal Reserve member banks, operates on a 12-hour day.

The board of governors of the Federal Reserve System voted earlier this year to expand Fed Wire by six hours -- from 12:30 a.m. to 6:30 p.m. eastern standard time beginning in 1997.

The move will make Fed Wire available during the operating hours of many overseas central banks, thereby limiting risk in the settlement of foreign exchange trades involving U.S. institutions.

Though participation by financial institutions in the new Fed Wire hours is voluntary, many bankers believe the Fed should give institutions more time to adapt to other changes in Fed Wire operating rules before putting the new hours into effect.

"Due to the magnitude of changes required for both the expansion of operating hours and the implementation of a new Fed Wire format, we urge the Fed to delay the expansion until after the revised Fed Wire message format has been adopted and tested," wrote Philip Corwin, the association's director and counsel of operations and retail banking; in a letter to the board of governors of the Federal Reserve System.

Mr. Corwin cited "insufficient personnel and inadequate resources," as hindrances to bank conformity with the new operating hours.

Nancy Pierce, vice president with Chase Manhattan Banking Corp. and a member of the corporate operations committee with the ABA, said, "A one-year delay should not be a problem for the Fed. I think they know how strongly we feel."

The new message format to which Mr. Corwin referred is part of the Fed's planned overhaul of systems that send financial payment instructions between the Fed, banks, and the U.S. Treasury.

Ms. Pierce recommended the new message format take priority over extended hours because of the confusion that could result from adapting to both changes simultaneously.

"Most large banks' funds transfer systems can easily go to an 18-hour day," she said.

"But what happens is all the other systems in a bank that feed our customer's accounts are not on-line, and those are the systems that we will spend a lot of time on changing."

Officials with the Fed declined to comment on the ABA letter.

Though financial institutions will not be required to conform to the new operating hours, many banks, Chase among them, plan on immediate participation regardless of when the Fed Wire hours change.

Ms. Pierce said that banks, especially those who are large players in the foreign exchange market, must do so to stay competitive.

But, competition aside, she said many banks recognize the rationale behind the Fed's move toward expanded hours.

She believed banks are obligated to help the Fed achieve its goal of reducing Herstatt Risk, named for the 1974 failure of a Cologne-based bank, Bankhaus Herstatt, which left U.S. banks exposed to millions in foreign exchange losses.

When German regulators shut the bank down in the middle of the day, Herstatt was unable to settle many of the day's transactions. As a result, banks refused to initiate new transactions until the Herstatt transactions were settled, creating chaos' in the markets.

BankAmerica Corp. was one of many institutions exposed to losses when the German bank failed, according to Lewis Teel, executive vice president at the San Francisco-based company.

In a presentation at the Swift/Sibos '94 conference in Boston recently, Mr. Teel recalled that he was asked to look into legal protections against settlement risk because Bank of America had been "caught up" in a $5 million dollar foreign exchange transaction.

At the conference, Mr. Teel pointed out that, in the 20 years since Herstatt failed, "despite all of the marvelous developments of trading risk management systems, the one area that has not progressed much since the 1970s is settlement risk."

But the extended hours is not by itself a solution to that risk, observers said.

In the ABA letter, Mr. Corwin wrote that the ABA viewed the longer operating hours "as a tool, not a direct means of reducing Herstatt risk."

Besides systems changes, the impact on banks as they prepare for the extended hours will likely include additional support and risk management personnel and possibly federal funds traders, Ms. Pierce said.

She also pointed out additional expenses to many of the larger banks, such as when payments are made to nonparticipating banks.

Ms. Pierce said banks may incur daylight overdrafts and be charged fees by the Fed.

"The fact that its voluntary creates a different issue for the large banks who will have to participate," she said.

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