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28 April 1998
Date: Tue, 28 Apr 1998 14:28:10 -0700 (PDT)
From: Declan McCullagh <declan@well.com>
To: cypherpunks@cyberpass.net
Subject: Fed Reserve says impossible to forecast impact of Y2K
Sorry, this isn't up on the web anywhere yet.
The text of my article about this morning's hearing where Kelley
testified:
http://cgi.pathfinder.com/netly/afternoon/0%2c1012%2c1936%2c00.html
An excerpt:
"I do not think that we shall escape unaffected. Some of the more
frightening scenarios are not without a certain plausibility, if this
challenge were being ignored. But it is not being ignored. While it is
probable that preparations may in some instances prove to be inadequate or
ineffective, an enormous amount of work is being done in anticipation of
the rollover of the millennium. It is impossible today to forecast the
impact of this event, and the range of possibilities runs from minimal to
extremely serious."
-Declan
PS: Note this does not include Q&A.
ADVANCE TEXT OF TESTIMONY TO BE DELIVERED BY
FEDERAL RESERVE BOARD GOVERNOR EDWARD W. KELLEY, JR.
BEFORE THE SENATE COMMITTEE ON
COMMERCE, SCIENCE, AND TRANSPORTATION
RE: THE YEAR 2000 AND COMPUTER SYSTEMS
TUESDAY, APRIL 28, 1998
I am pleased to appear before the Committee today to discuss the
Year 2000 computer systems issue and the Federal Reserve's efforts to
address it. The stakes are enormous, nothing less than the preservation of
a safe and sound financial system that can continue to operate in an
orderly manner when the clock rolls over at midnight on New Year's Eve and
the millennium arrives. So much has been written about the difficulties
ascribed to the Year 2000 challenge that by now almost everyone is familiar
with the basic issue - specifically, that information generated by
computers may be inaccurate or that programs may be terminated because they
cannot process Year 2000 dates. The Federal Reserve System has developed
and is executing a comprehensive plan to ensure its own Year 2000
readiness, and the bank supervision function is well along in a
cooperative, interagency effort, to promote timely remediation and testing
by the banking industry. This morning I shall first focus on the potential
macroeconomic consequences of the Year 2000 issue. Then I shall discuss
actions being taken by the Federal Reserve System to address its internal
systems, including Reserve Bank testing with depository institutions, and
its bank supervision efforts.
The Macroeconomic Effects of the Millennium Bug
The Year 2000 ("Y2K") problem will touch much more than just our
financial system and could temporarily have adverse effects on the
performance of the overall U.S. economy as well as the economies of many, or
all, other nations if it is not corrected. The spectrum of possible outcomes
0is broad, for the truth if the matter is that this episode is unique. We
have no previous experiences to give us adequate guideposts. A few economists
already are suggesting that Y2K-related disruptions will induce a deep
recession in the year 2000. That is probably a stretch, but I do not think
that we shall escape unaffected. Some of the more frightening scenarios are
not without a certain plausibility, if this challenge were being ignored. But
it is not being ignored. While it is probable that preparations may in some
instances prove to be inadequate or ineffective, an enormous amount of work
is being done in anticipation of the rollover of the millennium. It is
impossible today to forecast the impact of this event, and the range of
possibilities runs from minimal to extremely serious. In that spirit, let me
review with you some of the ways in which the millennium bug already is
influencing the U.S. economy and discuss some of the possible outcomes for
economic activity early in the next century.
Corporate business is spending vast amounts of money to tackle the
Y2K problem. To try to get a handle on the magnitude of these Y2K
expenditures, we have reviewed the most recent 10-K reports filed with the
SEC by approximately 95 percent of the firms in the Fortune 500. These are
the largest businesses in our economy, with revenues of around $5-1/2
trillion annually, and are likely to be on the cutting edge of efforts to
deal with the millennium bug. Before the end of the decade, these firms
report that they expect to spend about $11 billion in dealing with the Y2K
problem. (Of this total, financial corporations are planning expenditures
of $3-1/2 billion, while companies in the nonfinancial sector have budgeted
funds of around $7- 1/2 billion.)
These estimates undoubtably understate the magnitude of the Y2K
reprogramming efforts. In culling through the 10-K reports, we found that
many companies reported incurring no additional costs associated with Y2K
remediation efforts. I doubt such firms are unaware of the problem. Rather,
I suspect that some firms did not view their Y2K spending as having a
"material" effect on their bottom line, and some companies probably have
funded Y2K programs with monies already budgeted to their information
technology functions. Making an allowance for all costs-whether explicitly
stated or not-and recognizing that these Fortune 500 firms are only part of
the picture, an educated guess of the sunk cost of Y2K remedial efforts in
the U.S. private sector might be roughly $50 billion. To put this number
into perspective, the Gartner Group has estimated that Y2K remediation
efforts will total $300 to $600 billion on a worldwide basis. The U.S.
economy accounts for about one-fifth of world output, and thus our
estimate seems broadly consistent with the lower end of their range. Given
the experience of our own Y2K efforts to date, I would expect to see costs
rise further once all these Y2K programs are fully under way-ultimately
pushing costs up within the Gartner Group range.
Corporate efforts to deal with the Y2K problem are affecting
economic activity in a variety of ways. On the positive side, an important
element in some Y2K programs is the replacement of aging computer systems
with modern, state-of-the-art hardware and software. Such capital
expenditures-which I should note are not included in the $50 billion cost
estimate-will raise the level of productivity in those enterprises, and, in
general, the need to address the Y2K problem has increased the awareness on
the part of senior executives of the complexity and importance of managing
corporate information technology resources. The increased replacement
demand also has contributed to the spectacular growth recently in this
country's computer hardware and software industries-a process that I would
expect to continue for a while longer. But, ultimately, we are largely
shifting the timing of these investment expenditures: Today's added growth
is likely "borrowed" from spending at some time in the future. And, if
analyzing the dynamics of this situation were not already complicated
enough, some firms may "freeze" their systems in the middle of
1999-effectively forgoing the installation of new hardware and software
systems just before the millennium. This, too, could influence spending on
computer equipment-shifting some of it from 1999 into 2000.
While Year 2000 remediation efforts may give a temporary boost to
economic activity in some sectors, the net effect probably is negative. I
suspect the majority of Y2K expenditures should be viewed as increased
outlays for maintenance of existing systems, which are additional costs on
businesses. Other than the very valuable ability to maintain its operations
into the year 2000, few quantifiable benefits accrue to the firm--and
overall productivity gains are reduced by the extra hours devoted to
reprogramming and testing. Conservative estimates suggest that the net
effect of Y2K remediation efforts might shave a tenth or two a year off the
growth of our nation's overall labor productivity, and a more substantial
effect is possible if some of the larger estimates of Y2K costs are used in
these calculations. The effects on real gross domestic product are likely
to be somewhat smaller than this but could still total a tenth of a
percentage point or so a year over the next two years.
The United States is not alone in working to deal with the
millennium bug. Efforts by our major trading partners also are under way,
although in many cases they probably are not yet at so advanced a stage as
in this country. In Europe, the need to reprogram computer systems to
handle the conversion to the Euro seems to have taken precedence over Y2K
efforts, although there may be efficiencies in dealing with the two
problems at once. The financial difficulties of Japan and other Asian
economies certainly have diverted attention and resources in those
countries from the Y2K problem, increasing the risk of a Y2K shock from one
or more of these countries. But, on the positive side, large multinational
corporations are acutely aware of the Y2K problem, and their remediation
efforts are independent of national boundaries. There also are anecdotal
reports that many of these companies are extending their influence by
demanding that their extensive networks of smaller suppliers prepare
themselves as a condition of maintaining their business relationship.
Obviously, a great deal of work either is planned or is under way
to deal with the Year 2000 problem.
But what if something slips through the cracks, and we experience
the failure of some "mission critical" systems? How will a computer failure
in one industry affect the ability of other industries to continue to
operate smoothly? The number of possible scenarios of this type is endless,
and today no one can say with any confidence how severe any Y2K disruptions
could be or how a failure in one sector would influence activity in others.
We have many examples of how economic activity was affected by
disruptions to the physical infrastructure of this country. Although the
Y2K problem clearly is unique, some of these disruptions to our physical
infrastructure may be useful in organizing our thinking about the
consequences of short-lived interruptions in our information infrastructure.
In early 1996, a major winter storm paralyzed large portions of the country.
Commerce ground to a halt for up to a week in some areas but activity bounced
back rapidly once the roads were cleared again. Although individual firms and
households were adversely affected by these disruptions, in the aggregate,
the economy quickly recovered most of the output lost due to the storm. In
this instance, the shock to our physical infrastructure was transitory in
nature, and, critically, the recovery process was under way before any
adverse "feedback" effects were produced.
Last summer's strike by workers at the United Parcel Service is a
second example. UPS is a major player in the package delivery industry in
this country, and the strike disrupted the shipping patterns of many
businesses. Some sales were lost, but in many instances alternative shipping
services were found for high-priority packages. Some businesses were hurt by
the strike, but its effect on economic activity was small in the aggregate.
Hopefully, any Y2K shock to our information infrastructure would also be
transitory and would share the characteristics of these shocks to our
physical infrastructure.
What can monetary policy do to offset any macroeconomic effects?
The truthful answer is "not much." Just as we were not able to plow the
streets in 1996 or deliver packages in 1997, the central bank will be
unable to reprogram the nation's computers for the year 2000. The Y2K
problem is primarily an issue affecting the aggregate "supply" side of the
economy, whereas the Federal Reserve's monetary policy works mainly on
aggregate "demand." We all understand how creating more money and lowering
the level of short-term interest rates gives a boost to interest-sensitive
sectors (such as homebuilding), but these tools are unlikely to be very
effective in generating more Y2K remediation efforts or accelerating the
recovery process if a company experiences some type of Year 2000 disruption.
We will, of course, be ready if people want to hold more cash on New Year's
Eve 1999, and we will be prepared to lend to financial institutions through
the discount window under appropriate circumstances or to provide needed
reserves to the banking system. But there is nothing monetary policy can do
to offset the direct effects of a severe Y2K disruption. As a result, our
Year 2000 focus has been in areas where we can make a difference: conforming
our own systems, overseeing the preparations of the banking industry,
preparing the payments system, and contingency planning. Additionally, we
are doing all we can to increase awareness of this problem and to energize
preparations both here at home and in other parts of the world.
Background on Federal Reserve Year 2000 Preparations
The Federal Reserve operates several payments applications that
process and settle payments and securities transactions between depository
institutions in the United States. These systems are critical national
utility services, moving funds much as the national power grid moves
electricity. Fedwire is a large-value payments mechanism for U.S. dollar
interbank funds transfers and U.S. government securities transfers primarily
used by depository institutions and government agencies. These applications,
as well as the supporting accounting systems and other payment applications
such as the Automated Clearing House (ACH), run on mainframe computer systems
operated by Federal Reserve Automation Services (FRAS), the internal
organizational unit that processes applications on behalf of the Federal
Reserve Banks and operates the Federal Reserve's national communications
network.
The Reserve Banks also operate check processing systems that
provide check services to depository institutions and the U.S. government.
In addition to centralized applications on the mainframe, the Reserve Banks
operate a range of applications in a distributed computing environment,
supporting business functions such as currency distribution, banking
supervision and regulation, research, public information, and human
resources. The scope of the Federal Reserve's Year 2000 activities includes
remediation of all of these processing environments and the supporting
telecommunications network, called FEDNET. Our Year 2000 preparations also
address our computerized environmental and facilities management systems,
such as power, heating and cooling, voice communications, elevators, and
vaults.
Year 2000 Readiness of Internal Systems
The Federal Reserve is giving the Year 2000 its highest priority,
consistent with our goal of maintaining the stability of the nation's
financial markets and payments systems, preserving public confidence, and
supporting reliable government operations. The Federal Reserve completed
assessment of its applications in 1997; our most significant applications
have been renovated; and internal testing is underway using dedicated Y2K
computer systems and date-simulation tools. Changes to mission critical
computer programs, as well as system and user-acceptance testing, are on
schedule to be completed by year-end 1998. Further, systems supporting the
delivery of critical financial services that interface with the depository
institutions will be Year 2000 ready by this July and a depository
institution test program will be in place at that time. This schedule will
permit approximately 18 months for customer testing, to which we are
dedicating considerable support resources.
Our Y2K project is being closely coordinated among the Reserve
Banks, the Board of Governors, numerous vendors and service providers,
approximately 13,000 customers, and government agencies. We are stressing
effective, consistent, and timely communication, both internal and
external, to promote awareness and commitment at all levels of our own
organization and the financial services industry, more generally.
A significant challenge in meeting our Y2K readiness objectives is
our reliance on commercial hardware and software products and services.
Much of our information processing and communications infrastructure, as
well as our administrative functions and other operations, is composed of
hardware and software products from third- party vendors. As a result, we
must coordinate with numerous vendors and manufacturers to ensure that all
of our hardware, software, and services are Year 2000 ready. In many cases,
compliance requires upgrading, or, in some cases, replacing, equipment and
software. We have a complete inventory of vendor components used in our
mainframe, telecommunications, and distributed computing environments, and
vendor coordination and system change are progressing well. We are
particularly sensitive to telecommunications, an essential infrastructure
element in our ability to maintain a satisfactorily high level of financial
and business services. We have been working with our financial institutions
and our telecommunications servicers to find ways to facilitate
preparations and testing programs that will ensure Y2K readiness.
Nonetheless, this is an area that many financial institutions regard as
needing attention. We strongly support the FCC's program to draw increased
attention to the Y2K issue and the progress of the telecommunications
companies in the United States.
Oversight of Banking Industry Preparations
Ultimately, the boards of directors and senior management of banks
and other financial institutions must shoulder the responsibility for ensuring
that the institutions they manage are able to provide high quality and
continuous services beginning on the first business day in January of the Year
2000 and beyond. This critical obligation must be among the very highest of
priorities for bank management and boards of directors. Nevertheless, bank
supervisors can provide guidance, encouragement, and strong incentives to
the banking industry to address this challenge. Accordingly, the Federal
Reserve and the other banking supervisors that make up the Federal
Financial Institutions Examination Council, the FFIEC, have been working
closely to orchestrate a uniform supervisory approach to supervising the
banking industry's efforts to ensure its readiness. Detailed information
about our supervisory program is attached as an Addendum to this testimony
and is readily available on a web site maintained by the Federal Reserve on
behalf of these agencies.
Preparing the Payments Systems
In order to ensure the readiness of the payments system, the Federal
Reserve has prepared a special central environment for the testing of
high-risk dates, such as the rollover to the Year 2000 and leap year. Testing
will be conducted through a combination of future-dating our computer systems
to verify the readiness of our infrastructure, and testing critical future
dates within interfaces to other institutions. Internal testing is expected to
be completed by July, and external testing with customers and other
counterparties will then commence and continue throughout 1999. Network
communications components are also being tested and certified in a special
test lab environment.
We have published a detailed schedule of testing opportunities for
Fedwire, ACH transactions and other services provided by the Federal
Reserve. Our test environments have been configured to provide flexible and
nearly continuous access by customers. The Reserve Banks are implementing
processes to identify which depositories have tested with us, so that we
may follow up on any laggards.
We are also researching, in conjunction with our counterparties,
the benefits of Y2K testing that would span the entire business process. As
part of this effort, the Federal Reserve is coordinating with the Clearing
House for Interbank Payment Systems (CHIPS) and the Society for Worldwide
Interbank Financial Telecommunication (SWIFT) to provide a common test day
for customers of all three systems on September 26, 1998. The New York
Clearing House is coordinating an effort to establish common global test
dates among major funds transfer systems during April and May 1999.
We are also coordinating with the international community of
financial regulators to help mobilize global preparations more generally.
These efforts are discussed more fully in the Addendum. In particular,
through the auspices of the Bank for International Settlements,
international regulators for banking, securities, and insurance along with
global payments specialists recently jointly hosted a Year 2000 Round
Table, which was attended by over 50 countries. A Joint Council was formed
that will promote readiness and serve as a global clearing house on Year
2000 issues. In the final analysis, however, the regulatory community
recognizes that it cannot solve the problem for the financial industry.
Every financial institution must complete its own program and thoroughly
test its applications with counterparties and customers if problems are to
be avoided.
Contingency Planning
Despite our intensive efforts to prepare our computer systems, we
must also make plans for dealing with problems that might occur at the Year
2000 rollover. As you know, the Federal Reserve has been involved in contingency
planning and has dealt with various types of emergencies for many years. In
response to past disasters we worked closely with the affected financial
institutions to ensure that adequate supplies of cash were available to the
community, and that backup systems supported our operations without
interruption during the crisis period. These efforts primarily focused on the
orderly resumption of business operations resulting from hardware failures or
processing-site problems. In addition to disruptions to hardware or
processing sites, Y2K contingency planning must be directed at potential
software failures and interdependency problems with financial and
non-financial counterparties. Within this context, business resumption is
made more difficult because we cannot fall back to an earlier version of a
software package as this version itself may not have been readied for the
Year 2000. Y2K disruptions to utility services or depository institutions
can also directly affect the Federal Reserve's ability to conduct business.
So, in order to plan for the continuity of services, it may be necessary to
consider available alternate ways to provide services if a Year 2000
problem is identified.
The Federal Reserve has formed a task force to address the
contingency readiness of our payments applications. Although we have no
grounds for anticipating that specific failures could occur and we cannot
act as an operational backstop for the nation's financial industry, we view
it as our responsibility to take action to ensure that we are as well
positioned as possible to address major failures should they occur. We are
currently focusing on contingency planning for external Y2K-related
disruptions, such as those affecting utility companies, telecommunications
providers, large banks, and difficulties abroad that affect U.S. markets or
institutions. The Federal Reserve has established higher standards for
testing institutions that serve as the backbone for the transactions that
support domestic and international financial markets and whose failure
could pose a systemic risk to the payments system.
We recognize that, despite their best efforts, some depository
institutions may experience operating difficulties, either as a result of
their own computer problems or those of their customers, counterparties, or
others. These problems could be manifested in a number of ways and could
involve temporary funding difficulties. The Federal Reserve plans to be
prepared to provide information to depository institutions on the balances
in their accounts with us throughout the day, so that they can identify
shortfalls and seek funding in the market. The System will also be prepared
to lend in appropriate circumstances and with adequate collateral to
depository institutions when market sources of funding are not reasonably
available.
Our preparations for possible liquidity difficulties extend as well
to the foreign bank branches and agencies in the U.S. that may be adversely
affected directly by their own computer systems or through difficulties
caused by the linkage and dependence on their parent bank. Such
circumstances would necessitate coordination with the home country
supervisor. Moreover, consistent with current policy, foreign central banks
will be expected to provide liquidity support to any of their banking
organizations that experience a funding shortfall.
Closing Remarks
To sum up, the macroeconomic effects of Year 2000 preparations are
quite complex. As I have discussed, some industries may benefit in the near
term from increased sales associated with the their customers presumably will
have more productive systems in place sooner than might otherwise have been
the case. But, in the aggregate, preparing for the Y2K problem is likely
exerting a slight drag on the U.S. economy. The Y2K problem, in effect,
raises the rate of depreciation of the nation's stock of plant and equipment.
It forces businesses to devote additional programming resources simply to
maintain the existing flow of services from its computers.
As a provider of financial services to the economy, we are on
schedule with our own internal remediation efforts and will shortly begin
testing our interfaces with financial institutions. While we have made
significant progress in our Year 2000 preparations, our challenge now is to
ensure that our efforts remain on schedule and that problems are addressed
in a timely fashion. In particular, we shall be paying special attention to
the testing needs of depository institutions and the financial industry and
are prepared to adjust our support for them as required by experience.
As a bank supervisor, the Federal Reserve will continue to address
the financial services industry's preparedness, monitor progress, and
target for special supervisory attention those institutions that are most
in need of assistance. In addition, we shall track the Y2K progress of
external vendors and critical infrastructure suppliers, such as
telecommunications and electrical power utilities.
The problems presented to the world by the potential for computer
failures as the millennium arrives are real and serious. Because these
problems are unique to our experience in many ways, and because the impact
of computer-driven systems has become so ubiquitous, the event is unlikely
to be trouble free. While we can't predict with any certainty, there
clearly is the potential for problems to develop, but these need not be
traumatic if we all do our part in preparation. As the world's largest
economy, the heaviest burden of preparation falls on the U.S. But it is
truly a worldwide issue and, to the extent that some are not adequately
prepared and experience breakdowns of unforeseeable dimension, we shall all
be affected accordingly. There is much work to be done. We intend to do our
utmost, and hope and trust that others will do likewise.
In this spirit, Mr. Chairman, I want to commend the Committee for
inviting this panel to testify together on Y2K issues. This is the first
time that the Board has testified next to representatives of the
Departments of Commerce and Transportation, and the FCC. This is wholly
appropriate because our success in preparing for the millennium will
ultimately depend very much on one another's efforts.
Addendum
Supervisory Elements of the Federal Reserve's Year 2000 Preparations
1. Interagency Statements and Other Guidance
The Federal Financial Institutions Examination Council
(FFIEC)-composed of the Federal Reserve, the Federal Deposit Insurance
Corporation, the Office of the Comptroller of the Currency, the Office of
Thrift Supervision, and the National Credit Union Administration-has issued
a series of six advisory statements since June 1996, including statements
on the Year 2000 effect on computers, project management, business risk,
readiness of service providers, guidance to address customer risk, and
testing for readiness. An advisory on contingency planning is being
prepared.
As a result of these advisory statements, the industry's awareness
and the extent of its remediation efforts have significantly increased over
the past two years. The FFIEC is considering additional guidance to
financial institutions on the development of customer awareness programs
and the need to communicate with and address questions of retail customers
regarding Year 2000 issues.
2. Supervisory Reviews
In May 1997, the banking agencies committed to conduct a
supervisory review by June 30, 1998, of all insured depositories to assess
the state of their Y2K readiness. Subsequent reviews and examinations will
continue throughout 1999. Through March 31, 1998, the Federal Reserve has
conducted reviews of approximately 1,100 organizations. The Federal Reserve
and the other agencies appear to be on schedule to meet their stated goal.
These reviews have resulted in a significant focus of attention on the
subject matter within the industry and the agencies as well.
Deficient organizations are subject to increased monitoring and
supervisory follow-up including more frequent reviews. Restrictions on
expansionary activities by organizations that are deficient in their Year
2000 preparations have also been put into place.
3. Assessment of Supervision Review Results
The Federal Reserve has been conducting Year 2000 supervisory
reviews of financial organizations subject to our supervisory authority,
coordinating closely with state banking departments and other federal
banking agencies that may share responsibility for the banking
organizations. Based on these reviews, we conclude that management
awareness of, and attention to, the Year 2000 problem has improved notably
since the Federal Reserve and the other banking agencies escalated efforts
in early 1997 to focus the industry's attention on ensuring Y2K readiness.
Banking organizations are making substantial progress in renovating their
systems and, with some exceptions, are on track to meet FFIEC guidelines.
Most large organizations are actively engaged in the renovation and testing
of their mission critical systems. Smaller organizations are working
closely with their service providers in an effort to confirm the readiness
and reliability of the services and products on which they depend.
Similarly, many of the U.S. offices of foreign banks are heavily dependent
on their parent bank for their Year 2000 readiness.
4. Supervision Follow up
To address deficient organizations, the Federal Reserve is issuing
a confidential Deficiency Notification Letter to those rated less than
satisfactory with respect to their Y2K readiness program. We call for a
corrective action plan and put the organization on a 30-day reporting
regimen to monitor its progress. Given our concern that the organization
needs to use its resources to address its deficiencies, rather than
expanding, the Federal Reserve also asks the organization for advance
notification before entering into any contractual commitments or making
public announcements pertaining to prospective acquisitions that require
Federal Reserve approval. The agency can then determine the possible
effects of the expansionary proposal on the organization's deficient Y2K
readiness efforts, and possibly discourage or deny expansion if financial
and managerial factors are inconsistent with approval of the application.
5. Outreach Initiatives
The Federal Reserve is actively participating in numerous outreach
initiatives with the banking industry, trade associations, regulatory
authorities and other groups that are hosting conferences, seminars and
training opportunities that focus on the Year 2000 and help participants
understand better the issues that need to be addressed. Throughout the
country, the federal banking agencies have been working with state banking
departments and local bankers associations in order to develop coordinated
and comprehensive efforts to improve the local and regional programs
intended to focus attention on the Year 2000. These efforts will continue
consistent with the requirements contained in the Examination Parity and
Year 2000 Readiness for Financial Institutions Act (Public Law 105-164),
enacted March 20, 1998, which call, in part, for the banking agencies to
conduct seminars for depository institutions on the implications of the Y2K
problem on their ability to conduct safe and sound operations.
6. International Scope
The Federal Reserve has worked actively within the Bank for
International Settlements (BIS) to ensure that financial regulators around
the world are aware of the dangers posed by the Year 2000 and are working
to see that the markets and institutions they oversee are ready for the
century date change. Last September, the G-10 Governors issued a Year 2000
advisory that included a paper prepared by the Basle Committee on Banking
Supervision (Basle Supervisors) describing the serious nature of the
problem, identifying the issues that must be addressed, and outlining how
programs to address the issue should be structured. The BIS Committee on
Payment and Settlement Services (CPSS) has established a web site on which
payment systems around the world are posting short reports describing the
status of their readiness in order to promote the transparent sharing of
Year 2000 information.
We continue to participate in international meetings focusing on
the Year 2000 issue in order to increase awareness and promote greater
understanding and cooperation. Earlier this month, the BIS was the site for
the Year 2000 Round Table sponsored jointly by the CPSS, Basle Supervisors,
the International Organization of Securities Commissioners, and the
International Association of Insurance Supervisors. This meeting, which was
attended by financial supervisors and representatives from the private
sector from more than 50 countries, highlighted cross-border dependencies
and the need for international cooperation to ensure that the issue is
managed to minimize any disruptions and possible economic ramifications.
As a result of the Round Table, a Joint Year 2000 Council of
financial regulators was formed with the First Vice President of the
Federal Reserve Bank of New York serving as the chair. The Council will
serve as a contact point between the financial market regulators and market
participants including private sector groups specifically focused on
international issues. It will also promote readiness, identify sound
practices for dealing with the issue, and serve as a global clearing house
on Year 2000 issues more generally.
A survey by the Basle Supervisors conducted late last year
indicated that global awareness of the issue is increasing rapidly but that
much work remains to be done. While most central banks and regulators
express cautious optimism that their payments systems and financial
institutions will generally be ready, there is increasing recognition that
some problems are inevitable. To this end, increasing attention is being
focused on the need to identify likely potential problems before reaching
the century date change and to develop contingency plans to ensure the
stability of global financial markets.
The majority of foreign central banks are confident that payment
and settlement applications under their management will be Y2K ready. Like
the Federal Reserve, however, the operation of foreign central bank payment
systems is dependent on compliant products from hardware and software
suppliers and the readiness of telecommunication and electric power
infrastructures. Foreign central banks consider Y2K readiness testing to be
a critical and complex issue. The approach of foreign central banks toward
raising banking industry awareness varies widely. We are aware that many
European banks are stretched for resources as a result of the world-wide
demand for information technology staff resources and their conversion to a
single currency. Similarly, Asian financial institutions are focusing on
their well-known problems, possibly placing full Y2K preparations in
jeopardy.
7. Communications Efforts
We have been working intensively to address the issues faced by the
industry and to formulate an effective communications program tailored to
those issues. Our public awareness program concentrates on communications
with the financial services industry related to our Y2K readiness, our
testing efforts, and our overall concerns about the industry's readiness.
We have inaugurated a Year 2000 industry newsletter, have published periodic
bulletins addressing specific technical issues, and have established an
Internet Web site that can be accessed at the following Internet address:
http://org/fiservices/cdc. In addition, we have published a set of
guidelines for small businesses, including depository institutions, on Year
2000 issues and project management.
On behalf of the FFIEC, the Federal Reserve has developed a Year
2000 information distribution system, including an Internet Web site and a
toll free Fax Back service (888-882-0982). The Web site provides easy
access to policy statements, guidance to examiners, and paths to other Year
2000 Web sites available from numerous other sources. It can be accessed at
the following Internet address: http://www.ffiec.gov/y2k.
The Federal Reserve has also produced a ten-minute video entitled
"Year 2000 Executive Awareness," intended for viewing by a bank's board of
directors and senior management, that presents a summary of the Year 2000
five-phase project management plan outlined in the interagency policy
statement. In introductory remarks on the video, it is stressed that senior
bank officials should be directly involved in managing the Year 2000
project to ensure that it is given the appropriate level of attention and
sufficient resources to address the issue on a timely basis. The video can
be ordered through the Board's Web site: http://www.bog.frb.fed.us/y2k.
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