District Circular Letters

July 26, 1999

BANKING SUPERVISION AND REGULATION:
FDIC YEAR 2000 ASSET AND LIABILITY BACKUP PROGRAM

To State Member Banks
and Others Concerned
in the Twelfth Federal Reserve District

FDIC Requirements Regarding Year 2000 Data Backup

On June 9, 1999, the Federal Deposit Insurance Corporation (FDIC) published the enclosed rule in the Federal Register establishing a Year 2000 "Asset and Liability Backup Program." This rule requires each FDIC-insured depository institution that is rated less than satisfactory for Year 2000 compliance on or after July 31, 1999, to maintain a data backup program for certain deposit and loan account information in a standardized electronic format. The rule became effective on July 9, 1999, and sunsets on June 30, 2000.

The purpose of the FDIC's rule is to facilitate prompt and accurate restoration of key financial records in the event that an insured depository institution experiences a Year 2000-related computer problem. The rule sets out specific data requirements for the backup files and requires each affected institution to segregate and preserve certain information on a daily basis so that, in the event of a computer failure, files can be accessed using hardware and software located separately from the institution's primary electronic data processing system.

In early August 1999, the FDIC will notify each affected insured depository institution that will be required to maintain the backup program in the format specified by the FDIC. Such institutions must have the backup program in place by September 30, 1999, and must test sample output files with the FDIC by October 31, 1999. If an institution that was rated satisfactory on July 31, 1999, subsequently receives a less than satisfactory rating, the FDIC will advise it of a suitable timetable for completion of programming, testing, and implementation of the backup program.

Exemptions

The rule allows exemptions to the backup requirement. The primary federal regulator of any insured depository institution that is rated less than satisfactory may, at its sole discretion, exempt that institution from the requirement. The primary regulator must make a written determination that the backup program is not needed for the particular institution and submit the determination to the FDIC's executive secretary.

Reserve Banks will take into account the same prudential considerations described in the recently issued SR letter 99-20, "Phase III Year 2000 Supervision Program - Guidance on Ratings and Enforcement Actions" (see our letter of July 20, 1999) when determining whether a bank should be exempted from the backup program requirements. In all cases where an affected bank has not completed the testing and implementation phases, such an exemption would not be appropriate. Indeed, in all but the most unusual circumstances, if an organization is rated less than satisfactory by the Reserve Bank, it would appear inconsistent to grant an exemption to the FDIC rule.

Should a Reserve Bank choose to recommend an exemption to the FDIC rule, it will be required to submit a written analysis supporting the recommendation to the division director for Board staff consideration and review. For banks that are currently rated less than satisfactory, the recommendation must be submitted by July 26, 1999, or as soon as possible thereafter. For banks that are downgraded after July 31, 1999, the recommendation will be submitted within five days of the rating downgrade.

Termination of Backup Requirement

The requirement to maintain the FDIC backup program may be terminated in three ways: (1) the primary federal regulator changes the affected institution's rating to "satisfactory," (2) after December 31, 1999, the primary federal regulator determines that the affected institution's deposit and loan data systems are fully functional and reliable; or (3) the rule automatically sunsets on June 30, 2000.

For Additional Information

The complete FDIC notice describing the program in full was published in the Federal Register as 64 Fed. Reg. 30869 (1999). For additional information regarding the program or the Federal Reserve's Year 2000 bank supervision program, please contact Mr. Robert Johnson, Assistant Vice President, Banking Supervision and Regulation, at (213) 683-2738.

If you have questions about the Federal Reserve System's Century Date Change Project, please contact your local Business Development office, as listed below:

FEDERAL RESERVE BANK OF SAN FRANCISCO

Enclosure (Please note: Not all of the referenced attachments are available online.)