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Y2K and banking system liquidity

Tim Hampton

Throughout 1999, much central bank effort went into ensuring that possible public concerns about the impact of Y2K on the banking and financial systems did not have a material impact on the wider economy. Public concerns about banks, or individual institutions’ worries about how markets might behave, had the potential to create actual problems. Quite reasonably, banks might have responded to this risk by altering markedly the composition of their balance sheets, in favour of highly liquid assets, to ensure that they had sufficient liquidity if public or market sentiment regarding Y2K turned nasty. This article explains the pre-emptive and liberal approach the Reserve Bank of New Zealand took to assure banks of access to liquidity over the year-end period. Doing so helped avoid disrupting normal business and jeopardising the access of businesses and households to credit.