Y2K: What You Can Bank On
Phoenix Community Alliance
Arizona State University, Downtown Center, Phoenix, Arizona
For delivery September 2, 1999, at approximately 7:50 a.m. Pacific
(10:50 a.m. Eastern Daylight Time)
by Robert T. Parry, President, Federal Reserve Bank of San Francisco
Good morning. I'm delighted to be here today. Frankly, I'm here on a
mission--one I share with the other Fed Presidents and members of the
Board of Governors in Washington. We want to get information about Y2K
and the banking industry out to the public. Of course, I'm sure you all
know what the Y2K "bug" is. Some equipment has computer chips that won't
recognize the new century date, because they were designed to run assuming
the year began with the number "19," not the number "20."
Now, I know my Fed colleagues and I have a reputation either for not
saying much, or for not being clear when we do say something. In fact,
Chairman Greenspan once said, "If I seem unusually clear to you, you must
have misunderstood what I said." But my mission today is to be perfectly
clear--both about the impact of the Y2K problem on the U.S. financial
system and about the steps being taken to address it.
So I'm going to touch on four major points: First, what the Fed is doing
about Y2K compliance for itself; second, where we stand with the financial
institutions we supervise; third, what's going on in related areas beyond
the Fed's domain; and, finally, what you can do to ensure a smooth transition
for yourself as the century rolls over.
And I've brought with me two experts who'll help answer some of your
questions. Marla Borowski is an Assistant Vice President, and she manages
the District Cash Product Office. Bob Johnson also is an Assistant Vice
President, and he's responsible for regional and community supervision
of banks and bank holding companies in our District. After my remarks,
we'll all be available to field your questions.
Before I tell you why I'm confident about the U.S. financial system's
"state of readiness," let me mention that--as an economist--I deal with
probabilities all the time. I think the probabilities are very high that
on January 1, 2000, nothing very unusual is going to happen. The financial
services you've come to rely on--checks, ATMs, debit cards, credit cards,
direct payment, and direct deposit, for example--will operate normally.
But probabilities aren't certainties. Problems could crop up--just as
they could any day of the week, Y2K bug or not. For example, have you
ever been watching a close ball game on television, and suddenly your
screen goes blank because either the cable went out or the power failed?
Or have you gone to the checkout line at your supermarket and found the
cashier couldn't scan your groceries? Things happen. So I wouldn't be
surprised if there were some disruptions here and there. But I want to
stress this point: people at the Fed and elsewhere are making good progress--in
many cases, excellent progress--not only in resolving the Y2K problem,
but also in preparing to deal with any disruptions that may occur.
I'll start with the Fed's efforts to get its own house in order. To show
you how important addressing the Y2K problem is to us, let me quickly
describe our role in the settlement of financial markets. Every day, over
two trillion dollars pass through Reserve Bank books. That money represents
the settlement of the U.S. government securities market, the eurodollar
market, the dollar leg of all other foreign exchange transactions, a wide
variety of security and bond markets, and about sixty-six million checks
and sixteen million automated clearing house transactions--among other
things! Frankly, if the Reserve Bank systems don't function properly,
much of everything else in the U.S. financial system comes to a halt.
So, what's the current status? I'd say it's very good--not just for settlements,
but for all the systems that are critical to the Fed's mission. And the
status should be very good, because we've been working on this problem
for five years. As of June 30, 100 percent of our "mission-critical" systems
were classified Y2K compliant, and those systems are in use right now.
Yes, the Fed is at 100 percent!
Now, what about the institutions we supervise? The Federal Reserve and
the other federal banking agencies have examined every federally insured
depository institution in the country for Y2K readiness--not just once,
but several times. The banking agencies have set dates for completing
all phases of Y2K preparations. These include: making inventories of systems
with Y2K problems, developing plans to remediate or replace those systems,
implementing and testing Y2K compliant systems, and completing contingency
plans. We've found that banks are making excellent progress in meeting
these milestones. In fact, 99 percent of all federally insured banks,
thrifts, and credit unions are making satisfactory progress--which means
they've received the highest possible rating for readiness. And the few
that aren't ready now are getting our full attention. In addition, we're
requiring banks to assess customer and counter party risk and to take
steps to mitigate those risks. And we're overseeing major service providers
and software vendors as well.
Now let's move beyond the Fed's domain. This, of course, is a very broad
area. It includes everything from securities, insurance, and mutual fund
companies to stock exchanges and clearinghouses. It also includes public
utilities, such as power, water, transportation, and telecommunications,
as well as U.S. government agencies and even the businesses, financial
systems, and governments of countries abroad.
I'll start with the first category--the U.S. financial services industry
beyond commercial banks. Their regulators have been working toward Y2K
compliance, just as we have. State agencies and the Securities and Exchange
Commission have set milestones for renovation and replacement that are
similar to ours. And the progress appears to be moving along extremely
well. In fact, the SEC has indicated that the securities exchanges and
clearinghouses should be compliant well in advance of the new century.
As for the category of public utilities, it's being overseen largely
by the President's Council on the Year 2000. The Fed chairs the Workgroup
on the Financial Sector. This workgroup stays in constant touch with other
sector workgroups to identify problems and clarify priorities. Overall,
it looks as if major vendors of utilities will be on track with Y2K compliance.
And I'm pleased to note further that recent testing of financial data
transfers by a consortium of financial services companies and phone carriers
revealed no Year 2000 glitches. As for government services, the systems
most directly affecting our financial systems--those in Treasury and Social
Security--seem to be in good shape, although some testing with the Fed
remains to be done. So far, the test results have been quite positive.
Finally, I'll turn to the international arena. The Fed is involved in
this area through the Joint Year 2000 Council. This is an information
clearinghouse on Y2K issues for 170 countries. Governor Roger Ferguson,
of the Board of Governors in Washington, is the chairman. And the other
members include central bankers, bank supervisors, and insurance and securities
In addition, there's a private sector group known as the Global 2000 Coordinating
group. These people are working to coordinate Y2K initiatives in the world
financial community. Both the Joint Council and Global 2000 Group have done
a lot of work. They've assessed the readiness of various markets, conducted
surveys, and encouraged readiness in a variety of ways. But neither has
regulatory enforcement power, so the uncertainties in this area are higher.
To date, the news on this front is quite promising. Evidence from a large
test of domestic and cross-border payments in June shows a high level of
readiness from more than 500 financial market participants in 19 countries.
This test simulated Year 2000 transactions in 34 national and international
payment systems, with highly successful results.
Now that I've covered the ways we're trying to prevent problems, let
me turn to our plans to deal with problems that do crop up. Even though
we expect all payments methods to work, including checks, credit and debit
cards, and ATMs, we know that some people still may want to take out extra
cash during the changeover. So, as a precautionary measure, we're going
to increase the amount of cash in our vaults, and we'll also extend the
hours of our operation, if necessary. I understand that many banks are
doing the same. In addition, Reserve Banks have made it clear that they'll
stand ready to lend, in appropriate circumstances, to depository institutions.
Now, let me just note here that I don't think it's a good idea to take a
lot of cash out of your bank and put it under your mattress. Why? Because
the Federal Deposit Insurance Corporation does insure up to one hundred
thousand dollars of your money in the bank--but it doesn't insure your mattress!
My fourth major point is how you can avoid or minimize any Y2K problems
with your own finances. Here are some steps I recommend. First, go for
redundancy: back up your financial records, and as they come in, review
them carefully for accuracy. Second, check for Y2K readiness: run tests
on your own computer, and talk to your bank, your broker, and whoever
handles your money to find out the status of their Y2K readiness. Third,
security: watch out for scam artists trying to make a quick buck on Y2K
fears. Scrutinize Y2K products and services to make sure you really need
them and that they'll work. And guard your personal information, such
as bank account numbers, Social Security numbers, and credit card numbers.
Finally, rumors and scare stories are likely to increase as we get closer
to the new year, so I encourage you to get accurate information and maintain
perspective as you sort fact from fiction.
Well, that wraps up this general status report, which was a big part
of my "mission" today. The Fed has made communications about Y2K a mission,
because public confidence in our financial system is going to be critical
during the century date change. Fortunately, we're seeing evidence that
the American public--as usual--has a pretty good grasp of what's going
on. In fact, a July CBS News poll shows that only 8 percent of Americans
predict that they will personally face major problems related to the millennium
bug. I strongly believe that the more consumers know about Y2K, the more
likely they are to take rational precautions and not take drastic steps.
To the extent that those survey results reflect trust in the Fed and other
institutions charged with safeguarding the financial system in this country,
I'd say we're a lot closer to "mission: accomplished" than to "mission:
impossible"! And we at the Fed are prepared to continue to earn that trust
as the new millennium approaches and well beyond.