Federal regulators tried to calm fears Tuesday that stock market volatility would disrupt the banking system or the economy.
"I have not heard of any problems that cause me any extraordinary concern," said Wayne Rushton, senior deputy comptroller for bank supervision policy at the Office of the Comptroller of the Currency. "Things are working as they are supposed to work; the execution and clearing systems are perking along very smoothly."
Thomas C. Melzer, president of the Federal Reserve Bank of St. Louis, said the economy is sound. "The low money growth and low inflation of the current expansion mean that future prospects are not being jeopardized for the sake of today's prosperity," he said in remarks prepared for delivery at the University of Tennessee, Martin.
Still, regulators increased their monitoring of the banking industry after the stock market dropped 554 points Monday. For instance, the Comptroller's Office on Monday ordered examiners at large banks to collect up-to-date data on how much credit each institution is committed to provide to investment houses.
"Coming after 1987, both the banking industry and regulators are far better prepared to access information," Mr. Rushton said. "Believe it or not, we know stuff now before CNN does."
Because Monday's drop never threatened the payment system or the financial health of major investment houses, the government was not forced to use any of its more potent weapons to combat a feared liquidity crisis.
"The markets can be assured that the Fed was prepared to deal with any problems that arose," said Gil Schwartz, a former Fed lawyer who is now a partner in the Washington firm of Schwartz & Ballen.
Liquidity crises occur when otherwise healthy corporations are unable to refinance when debt comes due. This forces the firms to turn to banks, which often do not have enough cash on hand to cope with the sudden increase in demand. The Fed can intervene by lending banks billions of dollars, which in turn are lent to the credit-strapped corporations. The Fed also can bail out the clearing houses, which process everything from major stock deals to consumer checks. Finally, the Fed can urge banks to extend credit.
Michael ter Maat, an economist at the American Bankers Association, said an informal survey of its big-bank members found no lingering effects from the market plunge.
"Everything seems to be going very well," he said. "There has been a huge volume of foreign exchange and securities settlement transactions. But the systems have been able to handle it."
