The Bank of New York, the nation's 18th largest, had a brief $32 billion overdraft on its cash account at the New York Federal Reserve Bank when a computer failure last month snarled thousands of government securities transactions, a congressional committee was told yesterday.

By the end of the day, the overdraft had been reduced to $24 billion, and the bank actually had to borrow that amount from the New York Fed -- pledging all of its assets -- in order to balance its accounts overnight.

Aside from the unprecedented scale of the borrowing, and the spillover effects on the government securities market, the incident intensified concern at the Federal Reserve over the vulnerability of the nation's financial payments system to a technological glitch that could have disastrous consequences.

Federal Reserve Chairman Paul A. Volcker and New York Fed President E. Gerald Corrigan went before a House Banking subcommittee yesterday to describe how the computer failure occurred and how the Fed and the bank dealt with the crisis it caused.

On Wednesday, Nov. 20, transactions involving more than 32,000 different government securities issues poured into the Bank of New York, one of the largest processors of such deals on behalf of others.

The bank's computer system was supposed to be able to cope with up to 36,000 issues, but a programming glitch developed and, unknown to anyone, the computer began to "corrupt" the transactions and make it impossible for the bank to keep them straight.

Because of the computer system breakdown, the bank could not instruct the New York Fed where to send the securities arriving at the Fed on behalf of the bank's clients, and therefore could not get paid for them. The New York Fed was automatically taking money out of the Bank of New York's cash account to pay the sellers for the incoming securities, all of which are represented simply by computer records, rather than the familiar paper bonds still used by most corporations.

By Thursday evening, as hundreds of employes at a host of banks and government securities dealers tried to sort out the problems caused by the failure of the intricate and largely automatic network handling these transactions, the bank had a $32 billion overdraft on its cash account at the New York Federal Reserve Bank.

The bank's computer specialists finally came up with a "patch" for its computer program -- a process described yesterday by its chairman, J. Carter Bacot, as the electronic equivalent of patching a tire -- that allowed it to begin to clear some of the backlog. But just after midnight, the patch failed too, after the overdraft had been whittled down to about $24.2 billion.

The Fed kept both its nationwide wires for securities and cash transactions open in the early hours of Friday morning. When the patch failed, the Bank of New York was still able to borrow $700 million from other banks. The rest was covered by a $23.6 billion loan from the New York Fed. As collateral, the bank pledged all its domestic assets and all its customers' securities it was allowed to use for such purposes. Altogether, the collateral was worth $36 billion, according to the Fed.

The drama was not over. Around 5 a.m. Friday, the bank finally completed reconstruction of its customers' transactions from Wednesday. By 10 a.m., it had done the same for the Thursday deals. But, meanwhile, the rest of the government securities industry had begun its Friday activities, and securities and an overdraft were piling up again in the Bank of New York's account at the New York Fed.

"Faced with this situation," New York Fed President Corrigan told the banking subcommittee, "at about 11:30 a.m., we temporarily stopped accepting securities transfers for the account of Bank of New York in an attempt to stabilize the situation somewhat and to see whether it was practical to prevent further increases in the overdraft without causing excessive disruption in the market more generally. . . .

"Operationally, this meant that holders of government securities who had contracts to deliver those securities . . . to the Bank of New York for one of its customers [in return for payment] were temporarily unable to make delivery under those contracts," Corrigan said.

The stoppage lasted only for about 90 minutes that afternoon, and news of it did not spread widely for nearly an hour. Yet that disruption at the clearing bank was enough, Corrigan said, to make some market participants unwilling to trade securities among themselves. "Perhaps most importantly, there was also some evidence that investors were beginning to seek to break trades and financing transactions with dealers serviced by the Bank of New York."

Shortly after noon, the Bank of New York was able to begin handling the Friday transactions that had been piling up, and the Fed was again able to accept securities destined for the bank. By that point, the bank was operating with a computer system that had undergone a major overhaul in less than 24 hours.

The crisis was over, but its final bill is still mounting.

The Bank of New York was out of pocket about $5 million, an amount equal to about 7 percent of its earnings in the first nine months of this year, to pay interest on the money it had to borrow that Thursday.

It is still negotiating with many of the parties who may have sustained losses in transactions that were not completed on time. Such negotiations are common, said an official of one major securities dealer, because a few transactions are always going awry. This time it was thousands.

Some customers walked away in better shape. "Indeed, those individuals and institutions who bought securities in question received a windfall in that they received interest for the day [on the securities], but did not incur any cost of financing," Corrigan noted.

But any loss or gain in dollars, even with millions of dollars worth of interest at stake, is not the real issue. What worries both Federal Reserve officials and participants in the government securities market is the potential for a failure of the system.

On an average day, about $200 billion worth of government securities transactions take place involving about 27,000 separate transactions, Corrigan said. Some days the totals are far larger.

"Like it or not," Volcker told the subcommittee, "computers and their software systems -- with the possibility of mechanical or human failure -- are an integral part of the payments mechanism. The scale and speed of transactions permit no other approach.

"In the last analysis, no mechanical system can be entirely 'fail-safe' and also be commercially viable," he said. "The costs would simply be too high, and the money and Treasury securities markets could not operate at the present level of efficiency."

The Fed chairman pointed out that, in this case, the Fed was available to lend the $23.6 billion, on good collateral. "The effects in this instance were of unprecedented magnitude, measured by the amount of the overnight loan," he said. "But the effects in terms of market performance and risk were well contained. . . . I believe it would be wrong to overdramatize this incident."

Corrigan in his more detailed testimony sounded more notes of concern. "I believe our actions were prudent, disciplined and appropriate. In saying this, I should also confess that in some respects were were a bit lucky," he said.

Part of the luck was that the bank was able to get its computer going again as soon as it did. Another part, Corrigan said, was that Thursday was not an especially heavy day for securities transactions.

One government securities trader summed up the situation this way:

"We're all afraid something will go bump and send the market into a tailspin. . . . The Fed is working night and day to figure out what it can do. The banks are working night and day. But the amount of trading in financial markets is so large that we feel this is the No. 1 financial problem of the next few months. Banks have to be able to make settlements with each other."