L
O
O
K
I
N
G

F
O
R
W
A
R
D

The countdown is on for 01/01/2000 -- the start of the new century. On the last day of 1999 celebrants around the world will wait for the stroke of midnight with a mixture of excitement, curiosity, and trepidation. Some will greet the new year at parties planned years in advance, while others will be sitting in their offices wondering whether they started planning far enough in advance. Will the much-ballyhooed Y2K computer meltdown occur?

For the Federal Reserve the concern is not only to be certain that our internal systems are Y2K compliant, but also that we fulfill our charter as a regulator of financial institutions and as the nation's money manager. Some critical tasks spelled out in the Federal Reserve's charter are to ensure safety and soundness in the operation of financial institutions, to provide stability in financial markets, and to maintain the smooth functioning of the nation's payments system. It's hard to imagine that back in 1913, when members of Congress empowered the Federal Reserve System with these responsibilities, they could have envisioned a day when the financial system would be threatened more by outdated computer code than by banking panics.

Basically, it's just that -- outdated computer code -- that sits at the root of the Y2K problem which, depending on the newspaper you read, may cost as much as $860 billion worldwide to fix. Until recently, computers have traditionally used two-digit numbers, rather than four-digit, to represent years -- "98" for 1998 instead of "1998" -- to optimize space on very expensive mainframe processors. Thus, 2000 may be miscalculated by the electronic brain as 1900. In that case the software would not be able to perform certain functions or would produce erroneous results. This has the potential to affect not only mainframe and personal computers, but also machinery, appliances, security systems, and other devices with embedded microchips.

2000 AD:
Y2K Computer Glitch




1901 AD:
First Transatlantic
Wireless Message

We think of calendars as factual and scientific. In truth, they are merely a socially agreed upon system of keeping account of time. Calendars form a basis for planning agricultural, hunting, and migration cycles; for divination and prognostication; and for maintaining cycles of religious and civil events.

The fix is not simple, obvious, or inexpensive but can be done successfully. It requires tedious searching through computer code, much of it written in outdated languages by programmers who may have long since retired.

Planning for the year 2000 began throughout the Federal Reserve System in 1995, when tasks were defined and a timeline was established to ensure that any necessary modifications would be made to our internal systems to enable them to function normally over the century date change. Key steps in the process include assessing the scope of changes and resources needed to reach compliance, modifying program code, testing all systems (including contingency plans), and, finally, implementing the updated systems. A critical phase of the project is testing -- internally and externally with customers, vendors, and other service suppliers such as utilities, transportation providers, and environmental systems. The Reserve Banks now have completed the renovation and testing of our internal systems, and we are satisfied that all financial service applications of the Federal Reserve are Y2K ready. Testing applications with depository institutions will continue throughout 1999.

In addition to readying its own systems, the Federal Reserve System is working closely with other regulators and depository institutions to oversee the preparations of the banking industry as a whole. To facilitate this process, the System has spearheaded an extensive awareness and educational process.

Communication is a key element of the Federal Reserve effort to ensure banking industry readiness for Y2K. Fed representatives meet regularly with other regulators and trade associations to assess progress, share information, and facilitate information dissemination. A Century Date Change (CDC) web site at www.frbsf.org/fiservices/cdc/ provides immediate, up-to-date communication regarding the project. The Fed regularly communicates with financial institutions in the United States via newsletters designed to guide constituents through a maze of data on the subject and provides updates and information about resources, problems, and solutions. A booklet, "Small Business and the Year 2000," was produced for depository institutions to distribute to their customers. Institutions which have electronic relationships with the Fed receive regular bulletins alerting them to information such as timelines, details of testing, and information resources.

Outreach efforts reached a peak in mid-1998 with a series of seminars offered throughout the country for depository institutions. In the Twelfth District alone more than 1,200 participants attended 16 seminars in 10 locations to receive updates and ask questions regarding regulatory and readiness issues. Later in the year, the Federal Reserve scheduled a national satellite teleconference, which reached viewers gathered in more than 200 locations nationwide to learn more about testing, liquidity issues, and contingency planning and to have their questions answered.

As part of our regulatory role, the Federal Reserve is concerned with making sure that Y2K problems don't adversely affect the safety and soundness of the country's financial system. In conjunction with interagency guidelines, we review Y2K readiness of banks, bank holding companies, and other financial institutions. We have established testing and readiness requirements and regularly review institutions' project plans and progress as part of our examination of risk management and sound business practices.

Contingency planning is a crucial part of our Y2K readiness plan. This contingency planning involves looking beyond automated systems and developing a way to keep operating without customary resources. It requires testing, more testing, and refining various scenarios. The Fed's contingency and event management plans are dedicated to being able to respond quickly to unforeseen circumstances.

Another key responsibility of the Federal Reserve is ensuring that enough currency and coin are in circulation to meet the public's demand. This demand typically changes with the level of economic activity and with the seasons of the year. For example, during holiday seasons additional coin and currency are placed into circulation and then eventually returned to depository institutions by merchants. Depository institutions, in turn, ship the excess to their regional Reserve Bank, where it is credited to their accounts.

Time is the most valuable thing a man can spend.

Theophrastus(d.278 B.C.)
From Diogenes Laertius, Lives of Eminent Philosophers.

It is expected that the holiday season, coupled with the turn of the century, will cause the demand for coin and currency to increase at the end of 1999. Some individuals may choose to hold extra cash during the century rollover in case operating problems should affect any retail payment system. Also, since about two-thirds of U.S. currency is held outside the United States, there may be increased foreign demand. To meet this demand, the Federal Reserve has increased substantially its fiscal year 1999 print order from the Bureau of Engraving & Printing over the 1998 level. This increased amount of currency either in circulation or in vaults at the Federal Reserve and the Bureau will enable us to fill our customers' currency orders quickly.