OVERCERTIFICATION AND THE NYCHA's CLAMOR FOR A NYSE CLEARINGHOUSE

Bank clearinghouse associations provided critical emergency services to their member banks during times of crisis. However, these associations, and the New York City Bank Clearinghouse Association (NYCHA) in particular, also provided critical intra-day liquidity to the security settlement process of exchanges such as the New York Stock Exchange (NYSE) through a process termed overcertification. Due to the risks involved, the NYCHA suspended overcertification during the Panic of 1873, forcing the NYSE to close for an unprecedented nine trading days. The NYCHA then began negotiations with NYSE officials concerning provision of liquidity, the NYSE's clearing practices and who should bear the associated risks. Timberlake (1984) and Kroszner (1999) argue that bank clearinghouses evolved as private-sector solutions to serve as lenders-of-last-resort, and to constrain the risk taking of their members, particularly during crises. Our analysis shows that the NYCHA played a similar role in managing NYSE security settlement risks, and by encouraging the NYSE to adopt more efficient clearing processes.