Readying computers for Yr. 2000

Abstract

Edward Kelley, Jr., member of the Board of Governors of the Federal Reserve, recently testified before a House Bank Committee panel on the Federal reserve's efforts regarding the year 2000 computer systems problems. Excerpted remarks are presented. 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 early remediation and testing by the industry. All Federal reserve computer program changes, as well as system and user-acceptance testing, are scheduled to be completed by year-end 1998.

It is crucial that the Federal Reserve maintain reliable services to the nation's banking system and financial markets. I want to assure you that the Federal Reserve is giving the Year 2000 its highest priority, commensurate 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 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 early remediation and testing by the industry.

The supervision function is completing an assessment of the industry's readiness, will examine every bank subject to our jurisdiction by mid-1998, and will review their progress as part of all examinations conducted throughout the remaining months before the millennium.

We are taking a comprehensive approach to preparedness which includes assessments of readiness, remediation, testing, and updating proven plans and techniques used during other times of operational stress in order to be prepared to address potential century data change difficulties.

All Federal Reserve computer program changes, as well as system and useracceptance testing, are scheduled to be completed by year-end 1998. Further, critical financial services systems that interface with customers will be Year 2000 ready by mid-1998, permitting approximately 18 months for customer testing.

Many top personnel in the Federal Reserve System are working hard to manage this initiative. Our staff is putting in many extra hours to prepare for testing with customers, planning for business continuity in the event of any unanticipated internal systems problem, and enhancing our ability to respond to possible operating failures of depository institutions.

While there are challenges before us, I can report that we expect to be fully prepared for the century date change.

We are mindful that extensive communication with the industry and the public is crucial to the success of our efforts. Our public awareness program includes communications related to our testing efforts and our overall concerns about the industry's readiness. We continue to advise our customers of the Federal Reserve's plans and time frames for making our software Year 2000 ready.

We have inaugurated a Year 2000 newsletter and have just published our first bulletin addressing specific technical issues. We have also established an Internet Web site to provide depository institutions with information regarding the Federal Reserve System's CDC project. This site can be accessed at the following Internet address: http-j/www.frbs.org/fiservices/cdc.

To heighten the industry's awareness level, the Federal Financial Institutions Examination Council (FFIEC), issued a policy statement on May 5th entitled "Year 2000 Project Management Awareness," which updates the supervisory guidance first issued in 1996.

The statement emphasizes the regulators' concerns that inability to provide a compliant hardware and software environment to support the upcoming century date change would expose a bank to inordinate operational, financial, and legal risks.

Bank management must not only be aware of the many Year 2000 problems, but must also be sensitive to the magnitude of the efforts needed to achieve compliance and the consequent budgetary implications.

The statement also encourages banks to be largely completed with their renovation and well into testing of their major applications by year-end 1998 so that any substantive problems can be addressed in 1999.

The statement also calls upon banks to consider the Year 2000 risks posed by their borrowers and customers, as banks could be adversely affected by borrowers who are not prepared for Year 2000 processing.

Corporate customers who have not considered Year 2000 issues may experience a disruption in business, resulting in financial difficulties that could negatively influence their creditworthiness.

Examiners now verify that a bank incorporates a borrower's Year 2000 preparedness into its underwriting standards, and that loan officers assess the extent of Year 2000 computer problems that may influence a borrower's ability to repay its loans on a timely basis.

We also have sought to elevate foreign bank supervisors' awareness of the risks posed by the century date change and to solicit their assistance in monitoring the state of overall preparedness of foreign bank parents to ensure that they consider the needs of their U.S. offices.