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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.

    	####

    	END