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Before the George Washington University Y2K Group , Washington, DC
July 29, 1999

Continuing the Countdown to Year 2000:
Focusing on Public Disclosure and Public Confidence
As the countdown to the Year 2000 continues, and with only five months to go until the new
year, it is certainly prudent for us to focus now on the Year 2000 readiness of our nation and,
indeed, the entire global community. So I applaud the Research Program in Social and
Organizational Learning here at George Washington University for sponsoring this
wide-ranging conference. Over the course of several days, this assembly has discussed
important issues in many sectors of our economy. These Year 2000 discussions, and others
like them around the nation, will help to create public awareness and understanding, which
are very important building blocks in the structure of public confidence. I will come back to
the confidence issue in a few minutes, but I will commence with a review of progress to
Preparedness of the Domestic Banking Industry
First I want to provide today some perspectives on the Year 2000 readiness of the U.S.
banking sector. At the Federal Reserve, we are closely involved with preparations for the
century date change in the financial sector here and around the world. We expect there will
be glitches. Nothing this complex can be completely without fault. However, I want to
confirm at the outset that the Federal Reserve is ready for the Year 2000, and every current
indication is that the domestic banking system also is, for all practical purposes, ready for a
smooth transition.
Much of my emerging confidence results from the fact that the Federal Reserve System is
fully prepared for the Year 2000; 100 percent of the Federal Reserve's mission-critical
systems are ready. At the Federal Reserve Board and the 12 District Banks, we are using
today the automated systems that we will use in the Year 2000. In fact, we have been testing
these systems for more than a year with banks and thrifts that are linked to us around the
country for payments and related functions. These tests have gone extremely well. This is
significant because the Federal Reserve Banks operate the hub of the nation's payments
system, providing depository institutions with essential services in cash, checks, and
electronic payments. Thus, because of the Federal Reserve's readiness, Americans can have
confidence that the nation's basic payments infrastructure is sound and ready to process
payments as usual before and after the century date change.
Another fact that gives me confidence in the domestic financial sector's preparations for the
century date change is that almost all of the nation's banks, thrift institutions, and credit
unions are ready for Year 2000. The Federal Deposit Insurance Corporation (FDIC) reported
last month that 98.3 percent of insured institutions were ready. These good evaluations
reflect years of diligent work by thousands of large and small institutions alike to meet rather

aggressive deadlines for mission critical systems set by the regulators. As you may know,
banks were required to meet certain milestones for identifying, renovating, implementing,
and testing their mission critical automated systems to ensure that their customers would
receive the quality and timeliness of service they expect after the century date change. The
small handful of institutions that have not yet met the regulatory milestones are, I assure
you, receiving the full attention of the regulators.
Combined with the readiness of the Federal Reserve to support the nation's payments
infrastructure, the readiness of commercial banks means that we can expect that the
processing systems that support all methods of payment--ATM cards, debit cards, credit
cards, direct deposit and other electronic payments, checks, and even cash--will work
smoothly around the date change.
The readiness of the Federal Reserve and the extensive preparations in the banking system
do not, however, guarantee perfection. No one can say that there will be no problems in the
banking system when the century date rolls over. As we are all aware, processing and other
failures do occur in complex modern automated systems, often in ways that are rarely visible
to the public. We fix these annoying minor faults every day and go on, and this is what we
will do at the time of the century date change. Moreover, if isolated glitches do emerge, the
Federal Reserve and depository institutions will draw on their contingency plans to get
systems operating again as promptly as possible.
At the Federal Reserve, we have extensive contingency plans, many of them already well
tested during hurricanes, blizzards, and other events. It is important to emphasize that we
believe such contingency planning to be an important element of planning and preparedness
for a wide variety of possible events. It does not mean that we think particular problems are
likely. In general, we encourage all banking institutions to undertake appropriate
contingency planning, so they will be ready just in case there is an unexpected or unusual set
of events. For the special circumstances of the century date change, we have developed
additional wide-ranging plans to deal with contingencies of all kinds, even though we expect
the banking system to operate normally. Let me give you some examples.
One recent example of our contingency planning is the establishment of special liquidity
arrangements for borrowing by depository institutions. As lender of last resort, the Federal
Reserve always is ready to provide short-term loans to banks and thrifts that experience
temporary liquidity needs. For additional liquidity, the Federal Reserve announced a plan to
help healthy institutions meet credit demands late this year and in the first quarter of 2000
should they face short-term liquidity problems. This borrowing arrangement, by its very
existence, even if it is not widely used, should provide assurance to the public and banks that
the lender of last resort will be there to provide liquidity should banks need it during the
rollover to 2000.
To be prepared in case our fellow citizens choose to have a little extra cash on hand for the
century rollover--it will be a long holiday weekend for many, after all-- the Federal Reserve
is building an inventory of currency in our vaults. This inventory will be more than enough
to meet any conceivable demand for cash. Given the high expectation that all normal
payments methods will work, we do not expect that there will be any unusual demand for
cash, but if there is, we will be ready to meet it.
Just as the Federal Reserve has planned for even very remote contingencies, individual
banks and thrifts also have been required to extend existing contingency plans to address

new risks posed by Year 2000 and test these plans. These plans are meant to ensure that
customers can be confident they will have access to their funds during the century date
rollover period. For example, each institution was required to develop a liquidity plan
describing how it would meet demands for cash from its customers and how it would meet
the credit needs of its community. For some institutions, getting extra cash from the Federal
Reserve or borrowing in the financial markets or from the Federal Reserve may be part of
their plans.
Having detailed the readiness and contingency planning of the Federal Reserve and the
entire U.S. banking sector, I hope you can understand why I am increasingly confident that
generally normal operations will prevail in this country's financial institutions during the
century date change.
International Financial Sector Developments
Turning now to the international arena, I am encouraged at the progress being made this year
by most foreign financial regulators and the largest financial institutions to meet the Year
2000 challenge, but I am somewhat less certain of the international preparations than I am of
our domestic readiness.
Let me emphasize that I am somewhat less certain, not fearful. Given the wide variety of
institutions and systems around the world, and obvious difficulties in systematically
collecting definitive and current information regarding Year 2000 readiness, no one can
know for certain all of the international outcomes of the century date change.
However, in my role as Chairman of the Joint Year 2000 Council, which is an international
group of financial regulators representing banking, insurance, and securities regulators, as
well as central bankers and payment system overseers, I have information that helps bring
some of the issues into clearer focus.
The preparation of our domestic payments links is bolstered by the fact that foreign financial
services firms are generally believed to be among the best prepared in their respective
countries. We do know that the largest, most internationally active firms are making good
progress toward preparedness. They are forced to do so in order to remain viable in their
home markets and globally.
I also know that awareness among financial regulators is high. The Joint Year 2000 Council
has held meetings in all regions of the globe. These regional meetings have been attended by
regulators from over 100 countries. Similarly, the United Nations hosted a meeting for Year
2000 Coordinators in June, which was attended by representatives of more than 170
countries. These public sector efforts are mirrored by regional meetings held by leading
members of the private sector. Surveys of international financial regulators, as well as my
own conversations with many of them, also have demonstrated that a recognition of the
problem increasingly has been translated into concrete plans and actions, many of which
have gathered momentum in the last six months.
Another positive perspective flows from the large and very successful test of domestic and
cross-border payments systems last month. In this test using a simulated Year 2000
environment, more than 500 financial market participants from 19 countries were able to
complete transactions in 34 national and international payment systems. The test included
sending and receiving payment instructions, and payment settlements. There were virtually
no errors, and the few problems discovered were remedied quickly.

That cross-border test is one example of a broader development. We are getting increasingly
positive information regarding the preparedness of core financial systems overseas,
importantly including payment and settlement systems, that could, if not prepared, trigger
difficulties in the world's financial operations. These systems have generally implemented
extensive internal testing and most are testing with participants, as well. The large test last
month does seem to confirm that Year 2000 readiness has improved in many of the more
important financial sectors around the world.
Avoiding Complacency
We should not let these recent successes lead to complacency, either domestically or
internationally. Domestically, institutions should continue to make preparations for the
rollover period through event management and contingency planning, and in a very few
cases by further remediation work. Most importantly, this should include maintaining an
active effort to keep customers appropriately informed. Because of the important role of
public confidence in sustaining financial stability during an event such as the Year 2000
rollover, in which there are inevitable uncertainties, persistent and effective public
communication is essential.
Full and fact-based information will certainly help individuals maintain perspective and
encourage them to avoid taking needless risks. On the other hand, incomplete information or
misunderstanding may cause some to take risks such as shifting deposits from banks, or
withdrawing large sums of cash, or even making unreasoned decisions about other assets
they hold. Without solid perspective about Year 2000 preparations, others may fall victim to
Year 2000-related frauds or be asked to buy Year 2000 products and services of
questionable value.
Similarly, there is still work to be done internationally. First, while the financial sector
worldwide is considered to be ahead of most other sectors, it is generally thought that the
United States still leads most other countries in the degree of preparedness, although some
are as advanced as we are. For example, testing programs and in some cases further
remediation efforts still need to be made in some countries, although these activities are
obviously quite advanced in our major trading partners and the other major industrialized
economies. Second, all countries should hold themselves to the highest standard of
self-disclosure, so that financial markets can make fully informed decisions. This need for
disclosure includes industrial countries, as well as developing countries. Similarly, financial
market participants need to seek full information on international preparedness, and make
reasonable, calm, and considered--not hasty--trade-offs between risk and reward.
Now that it seems as though the developed world is generally well positioned in dealing with
the Year 2000 problem, the focus has shifted to the "emerging market countries." This group
is described by some to be at the greatest risk of failure due to technical difficulties. My
concern is that "emerging market countries" is too broad a group of nations, numbering well
over 100. It is important that emerging and newly industrialized economies making good
progress toward preparedness, and there are many, disclose that as clearly as possible.
Market participants should look for and make those disclosures part of their decisionmaking.
Those "emerging market economies" that are not making satisfactory progress should
disclose their status and seek assistance as they work to remediate mission-critical systems
and engage in contingency planning. In particular, financial institution preparedness can be
hampered by a lack of preparedness in critical infrastructure--telecommunications, power,
and water. This cannot be taken for granted. I would, however, note that many of the

countries that may be the farthest behind are also those that are least dependent upon
technology. Similarly, many of these countries have the fewest links to the international
financial markets, and their performance during the century date change is least likely to
have a significant cross-border impact. Finally, good contingency planning, including manual
work-arounds may avoid serious problems. Ultimately, however, systems will have to be
fixed or replaced, whether before the century date change or after, and the sooner the
process is started, the better.
To sum up, I believe that the U.S. banking system is largely ready for the Year 2000 and that
major foreign financial institutions generally are working diligently to be ready as well by
January 1. Thus, I believe that the Year 2000 in the financial sector of the United States and
many other countries is really less of a technical issue now than it was last year at this time.
Moreover, the relevant regulators here and around the world know what needs to be done
over the next five months, and are communicating with the business leaders managing the
world's financial institutions. The progress we see in the global financial sector and the
evidence from successful cross-border and domestic tests are also positive signs. Thus, with
the technical and business elements generally making good progress, the real issue remaining
for the United States and other leading countries is that of public awareness, understanding,
and ultimately, public confidence.
We should all recognize that the Year 2000 event is unique in that we all know that it will
occur, but exactly what will occur is uncertain. In this environment, we should listen to the
most reasonable and responsible sources.
Part of maintaining public confidence is fact-based disclosure to both the public at large and
to market counterparties. Disclosure still remains an issue for some, particularly as
"emerging market economies" seek to distinguish those making good progress from those
that need to increase efforts. Many emerging market and newly industrialized countries are
making good progress. For some countries, technical challenges may remain, particularly for
those that recognized this problem relatively recently.
Finally, we know that there are likely to be some glitches, which I would expect to be small
and of short duration. Similarly, I would expect any international disturbances to be limited
in terms of the number of institutions and countries affected. In order to achieve that
outcome, however, some countries and institutions should focus on mission critical systems,
and all should engage in contingency planning as the key activity now.
By remaining dedicated for the next five months we can all ensure that the work of the last
several years is completed fully, and any remaining risks are minimized. I believe that those
who have been working on this effort will rise to the challenge.

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