By Paul Kiernan and Orla McCaffrey 

The Federal Reserve said Wednesday an unspecified error disrupted all of its financial-services systems in an extraordinary event that took down key payment systems used by banks, businesses and government agencies for several hours.

Central-bank officials couldn't immediately recall a similar episode affecting its systems, which had been seen as extremely reliable. They allow the Fed, which is known primarily for setting interest rates, to perform its less-public role of acting as a bank for the nation's banks and for the U.S. government. It handles tasks including collecting checks, electronically transferring funds, and selling and redeeming Treasury bills -- services that were all offline for more than three hours on Wednesday.

"While root cause is currently being evaluated, there is no indication that the issue is the result of a cyberattack," a Treasury Department official said in a statement sent to banking regulators at 1:47 p.m. ET. A Treasury spokeswoman had no immediate comment.

The Fed sent an alert to users of its financial services at 12:43 p.m. of "a possible issue or disruption to multiple services." A subsequent alert said Fed staff became aware of "a disruption for all services" beginning around 11:15 a.m.

"We acknowledge that payment deadlines are impacted and will communicate remediation efforts to our customers when available," the Fed said.

The full impact of the disruption couldn't immediately be discerned. But the Treasury memo to regulators said it prompted the Payments Risk Committee -- a private-sector group of senior bank managers sponsored by the New York Fed -- to initiate "emergency communications protocols." Treasury said it would provide the group with updated information through periodic conference calls.

The disruption caused a payment backlog to build up at banks, which they began working through once the issue resolved. The Fed told clients that "the backlog of files may take time to clear."

The issue didn't pose a major problem for large lenders, some of which cleared their backlogs just a few hours after the systems came back online, according to people with knowledge of the banks' operations. Some banks began exploring contingency plans regarding how they would shift their operations if Fedwire remained down for a prolonged period but ended up not employing them.

Aaron Klein, a senior fellow at the Brookings Institution, said the glitch underscored broader problems with the Fed's payments systems, in which checks can take two business days to clear. Central banks in other countries -- including England, Brazil and Mexico -- implemented instant payment systems more than a decade ago. The Fed doesn't anticipate doing so until 2023.

"For Americans who were counting on their paychecks being available Friday the 26th, if this glitch means that my payment isn't going to turn up until March 1, it could result in millions of dollars in overdraft fees for people living paycheck to paycheck," Mr. Klein said. "It's not just the fact that it happened, it's the fact that it happened on Wednesday the last week of the month that might make it significant."

A Fed spokesman said the central bank is extending its hours of operations to clear the backlog of transactions and "would not expect there to be financial consequences for individual account holders because of the temporary disruption."

One of the services taken offline was the Fedwire Funds Service, which the Fed describes as "the premier electronic funds-transfer service that banks, businesses and government agencies rely on for mission-critical, same-day transactions." Entities use the service to send or receive payments, settle positions with other financial institutions and to submit tax payments, among other activities. It processed an average of 727,313 transactions per day in 2020, with an average value of $4.57 million.

Also affected were FedACH, an automated clearinghouse network that enables debit and credit transactions, and Fedwire Securities, which provides transfer and settlement services for securities issued by the U.S. Treasury, government agencies and government-sponsored housing enterprises.

The first service to be restored -- at 2:17 p.m. ET -- was the Fed's central bank programs, which include setting interest rates and allowing financial institutions to review and manage the money they hold at the Fed, called reserves. Fedwire and FedACH were back shortly before 3 p.m.

The Treasury Department's memo to regulators said the disruption "required a reboot of servers impacting all payment channels."

--Andrew Ackerman and Michael S. Derby contributed to this article.

Write to Paul Kiernan at paul.kiernan@wsj.com and Orla McCaffrey at orla.mccaffrey@wsj.com

 

(END) Dow Jones Newswires

February 24, 2021 19:09 ET (00:09 GMT)

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