Good morning. It's a pleasure to
have this opportunity to speak with the leaders of the credit
union industry. My topic today is a timely one--the Year 2000. My
comments will focus on the readiness of the financial services
industry in the United States and the significant work and
coordination that have occurred globally to prepare for the
century change. The century date change poses considerable risk
and is a major challenge for all sectors, both public and private.
Although U.S. financial market authorities established specific
and aggressive deadlines for their industries to prepare for the
century date change, in the final analysis, the boards of
directors and senior management of firms are responsible for
ensuring that their organizations are prepared for the Year 2000.
We turn to them, ultimately, to ensure that their firms are able
to conduct business and provide uninterrupted services after the
century date change.
Increased Confidence in
Readiness of U.S. Financial Industry and Other Sectors
With only eighty-six days remaining before the century rollover, I
believe that the U.S. financial sector is ready. My assessment is
based on publicly available facts and information developed by
supervisors and industry participants. More than 99 percent of the
approximately 22,000 federally insured depository institutions and
credit unions have demonstrated to examining supervisors that they
have completed preparations for the Year 2000, tested their
mission-critical systems, and put them into production. I know
that credit unions, as well as banks and thrifts, have been making
an extra effort to be prepared, and I have been particularly
impressed by how the credit union industry and its regulator, the
NCUA, have met this challenge.
Other financial industries, such
as securities and futures brokers, dealers, and markets have
completed or are completing Y2K-readiness certifications, and both
industries have participated in large-scale "street"
tests during which literally hundreds of thousands of
forward-dated transactions were processed on exchanges and then
cleared and settled using automated systems that simulate the
century rollover at their depositories and clearing houses. The
tests revealed Y2K errors at a level of something less than
one-tenth of 1 percent, and all were quickly corrected. In fact,
the testing tools now being used are so thorough that in many
cases non-Y2K program bugs have been identified in existing
programs and systems, and I am happy to report that they have been
eradicated as well.
Retail and wholesale payment
systems--a vital part of the financial sector and one in which the
Federal Reserve is a major service provider--are engaged in a
similar process. I can assure you that the Federal Reserve has not
spared any effort in preparing its internal systems and the
financial services and products we provide to financial
institutions for the Year 2000. We have completed Y2K preparations
for our services and products, and in June 1998, we opened a
testing facility for our customers. To date, more than 9,000
financial institutions have tested the services they use with the
Federal Reserve. These represent all of our major customers in
terms of transaction volume and dollar amount of the items
processed through the Federal Reserve. We also have tested the
automated payment services we provide to federal agencies such as
the Social Security Administration to ensure that banks can
receive government payments and then post the deposits to their
customers' accounts. The New York Clearing House, in particular,
and other private commercial entities that process wholesale and
retail payments have followed testing programs similar to ours.
No one can say with certainty
that there won't be any problems or disruptions during the century
rollover. However, based upon the information I have shared with
you, we expect that any disruptions or glitches in the United
States that do occur will be minor and of limited duration.
Moreover, because there is an expectation that something somewhere
will go wrong, the financial sector--from the regulators to the
markets and payment systems to the smallest introducing broker or
bank branch--is preparing contingency plans.
I would also like to emphasize
that a percentage of automated systems are down every day without
causing serious disruptions to commercial transactions and
markets. For example, 1 to 2 percent of ATM machines in the United
States are down at any given moment--some simply because they are
out of paper--yet consumers know to go down the block to another
machine or into the bank branch or local supermarket to obtain the
cash they need. Even more serious disruptions periodically occur:
The New York Stock Exchange and, only last month, the Chicago
Board of Trade computers have experienced glitches that caused
their markets to close temporarily without causing serious
disruption to the U.S. financial markets. In all of these
situations, Americans react with typical aplomb: They prioritize
and address the most serious safety and well-being issues first,
and they usually are willing to tolerate some inconveniences and
delays related to less-critical needs.
Increase in Readiness
Information and Readiness of Other Domestic Sectors
As I said earlier, my assessment of the financial services sector
is based on publicly available facts and information. Even as late
as this spring, Y2K information about firms and industries was
largely sketchy or incomplete throughout the world. In many
countries, few firms or sectors were willing to provide
information about the Year 2000 process or their status relative
to national and international benchmarks. Failure to disclose
caused considerable concern in markets. Market participants began
to assume that firms and sectors that were not making some type of
self disclosure probably were seriously behind in their
preparations for the Year 2000. This assumption engendered the
potential for overreaction by market participants and consumers,
including the potential for withdrawal from markets and commercial
relationships and other rational and irrational risk-mitigation
techniques.
I believe that the potential for
overreaction has been greatly reduced in recent months because of
a dramatic improvement in disclosure and confirmation of readiness
through multiparty testing.
First, in the United States, the
President's Council on Year 2000 Conversion, led by John Koskinen,
forged unique and successful cooperative partnerships between
critical public agencies and related private sectors and made
those sectors accountable to the American public through the
quarterly release of sector assessment reports. The President's
Council, established in February 1998, is made up of more than
thirty major federal agencies that act as sector coordinators in
promoting Year 2000 public and private sector action within their
respective policy areas. Quite simply, the President's Council has
spurred the government and whole industries to coordinate Y2K
preparations, set benchmark dates for readiness, and organize and
report the results of inter- and cross-industry tests.
The electric power and
telecommunication industries, which are critical to the operation
of the financial services industry, are excellent examples of this
achievement. Neither industry is supervised in the way that the
financial services industry is, yet their umbrella agencies--the
Department of Energy and the Federal Communications
Commission--were able to energize industry-led groups such as the
North American Electric Reliability Council (NERC) and the Network
Reliability and Interoperability Council (NRIC). The results of
their efforts can be read in the assessment report released by the
President's Council last month. As of June 1999, electric power
distribution companies' serving 96 percent of the nation's
electricity needs were ready for the Year 2000. Similarly, as of
July 1999, long-distance telecommunications carriers controlling
92 percent of domestic calls were 99 percent Y2K compliant.
Second, regulators and
private-sector firms have been exerting pressure on market
participants and commercial firms to provide information about Y2K
readiness. Banks and broker-dealers have been required by their
regulators to communicate with customers about their Y2K programs
and readiness. Moreover, financial institutions, which have a duty
to assess and manage the Year 2000 risk, have been seeking Y2K
disclosure from major customers and counter parties. If these
entities are publicly traded companies, they are required by the
SEC to address Y2K readiness in their quarterly filings.
Private-sector groups, such as the Global Year 2000 Co-ordinating
Group made up of global banking and financial services firms, have
been very active in prodding market participants to publish
information about their own readiness. The Global 2000 Group has
also been instrumental in encouraging countries to produce
information about the readiness of key sectors within their
borders.
Third, we've seen increasing
efforts by the media to provide factual and balanced reports on
the Year 2000. I think you'll agree that the press is now
reporting the good news as well as the "what if" pieces.
The Federal Reserve and our sister agencies plan to engage the
media in an ongoing conversation about the financial services
industry through the rollover period. We expect intensive media
coverage during the rollover period, and the President's Council
will be running a national Information Coordination Center,
supplemented by reports from agencies and industry members, that
will provide the public with accurate, timely, and complete
information about the operation of critical sectors in the United
States.
These disclosure initiatives,
assisted by legislation that avoids liability for Year 2000
disclosure statements made in good faith, literally have opened
the gates of information and offer a powerful antidote to any Y2K
gloom-and-doom stories generated by the media.
Year 2000 Market Indicators
and Federal Reserve Monetary Preparations
Over the next few months and through the first part of the new
year, the Federal Reserve, like other central banks, may be facing
some unusual, but not unmanageable, challenges in carrying out its
responsibility to meet market demands for currency, reserves, and
liquidity more generally. We already have seen signs of heightened
demands for liquidity and safety in the United States. The Federal
Reserve expects banks and other financial intermediaries,
including credit unions, to have reasonable plans in place to
manage cash and liquidity and to provide for contingencies over
the century date change. In addition, the credit union industry,
through the Central Liquidity Facility, has access to a $20
billion line of credit at the Treasury Department. But as the
lender of last resort, the Federal Reserve stands ready to lend.
We recognize our responsibility to ensure that adequate overall
levels of liquidity are available and to provide a backstop to the
financial system. Along these lines, the Federal Reserve Bank of
Kansas City and U.S. Central have an arrangement in place for U.S.
Central to borrow on short notice and to channel those funds to
credit unions that need it.
The Federal Reserve has a number
of tools available to effectuate monetary policy and to satisfy
market liquidity needs. For example, we use our open market
operations to provide liquidity by entering the market to buy or
sell government and agency securities. Recently, we created
several new tools to help fine-tune our open market operations and
to reassure market participants that adequate liquidity will be
available when needed. First, we lengthened the maximum term of
our repurchase agreements, up to ninety from sixty days; this is a
permanent change in our operations. Second, we are willing to
accept a broader range of collateral in repurchase transactions,
such as pass-through mortgage securities of government-sponsored
enterprises. Third, we will be selling options on overnight
repurchase agreement transactions for exercise on specific days in
December 1999 and January 2000; the details on this are still
being worked out. These latter programs have been authorized only
for the Y2K period. We have seen recent butterfly spreads and
other measures of Y2K pressures in U.S. markets respond positively
to the announcement of these tools.
Even with the flexibility
provided by these tools, it may be difficult, if the markets
become more volatile, to forecast aggregate reserve demand and
supply, engendering the potential for an unexpected shortfall in
reserves. Moreover, it is possible that the distribution of
liquidity will become uneven--some banks and perhaps some credit
unions may receive increased deposits and be flush with funds
while others may experience unexpected shortfalls. And many banks
could experience unusual loan demands related to the Y2K needs of
their customers. Broadly speaking, uncertainties about Y2K have
given rise to a general reluctance among lenders to extend
unsecured credit over the year-end. At the same time, borrowers
are trying to lock in funding now for the year-end rather than
face the possibility of high interest rates or market disruptions.
To help meet unusual funding and liquidity needs during the period
around the century date change, the Federal Reserve has created a
special liquidity facility as an adjunct to its discount window
programs.
The special liquidity facility
will be open from October 1, 1999, through April 7, 2000. It will
be available to depository institutions--including credit
unions--that operate in the United States, that are in sound
financial condition, and that have made an arrangement with their
Federal Reserve Bank. Loans must be adequately collateralized and
will be made at a penalty rate of 150 basis points above the
FOMC's targeted federal funds rate. In contrast to subsidized
adjustment credit, which will still be available, borrowers from
the special liquidity facility will not be required to first seek
credit from other market sources, and the use of borrowed funds
will not be limited or monitored. Moreover, loans can be
outstanding for any period while the facility is open. The Federal
Reserve's special liquidity facility is similar to the so-called
"Lombard"credit facilities offered by a number of
European central banks. We do not intend for any supervisory or
market stigma to be attached to use of the facility; if it does,
then the potential for this facility to ease Y2K liquidity needs
may not be fully realized. Banks' willingness to use the facility
should help to maintain orderly markets and to cap the federal
funds rate in those markets.
In addition, in a September 28,
1999, statement, the four banking agencies recognized that a few
financial organizations might be affected by unusual market
responses to the century date change, causing temporary growth in
balance sheets resulting from deposit inflows or heightened loan
demand. Should a banking organization believe that its capital
ratios may temporarily decline and result in certain consequences
under statutes and regulations administered by the federal banking
agencies, bank management is urged to contact its primary
supervisor to discuss these issues. The banking agencies will
consider whether the institution exercises prudent and responsible
measures to manage its balance sheet, maintains a fundamentally
sound financial condition, and provides evidence that any drop in
capital ratios is temporary.
One final point about
liquidity--as I said above, we expect payment mechanisms to
function smoothly. However, it is possible that currency demands
will increase over the next few months. The Federal Reserve is
prepared to meet any currency demands that may arise, and we are
taking a number of steps to ensure that cash is stored at numerous
sites around the country to allow banks to meet any sudden or
unexpected spikes in the currency needs of their customers.
International Efforts and
Readiness Abroad
On the international front, we have seen tremendous progress in
the awareness of the Year 2000 issue. Most countries now have Y2K
national coordinators and are providing more information about
their efforts. Again, the financial services sector abroad leads
all others in preparedness. The international telecommunications
industry also appears ready, and service should be reliable
between major cities. This progress again can be traced to a
number of public and private-sector initiatives.
United Nations Cooperation
Center
Earlier this year, the United Nations Committee on Informatics
held two highly successful meetings for national Y2K coordinators.
The meetings were designed to promote awareness and provide tools
for coordinators to use to organize domestic Year 2000 programs.
At the second meeting held in June, more than 170 countries were
represented--more countries than have ever attended a special UN
meeting. The UN is encouraging countries to issue disclosures
about their Year 2000 programs and progress and has established a
Year 2000 Cooperation Center, which is publishing readiness
country reports disclosed by countries on a web site. The center
will also publish reports on the impact of the date change on
critical sectors within countries during the rollover period. The
web site provides information on the status of key sectors within
a country, including the public infrastructure.
Joint Year 2000 Council
In April 1998, a group of authorities on international financial
markets--the Joint Year 2000 Council--was established by the Basle
Committee on Banking Supervision, the Committee on Payment and
Settlement Systems, the International Association of Insurance
Supervisors, and the International Organization of Securities
Commissions. The council has provided the key forum for Y2K
communications among financial market authorities around the
globe. To date, more than 100 countries have participated in our
activities. I chair the Joint Council, and I am very proud of what
we have achieved over the past year.
The Joint Council has issued a
number of guidance papers to assist regulators in organizing the
Year 2000 efforts of the financial services industries within
their countries. These papers address the scope and impact of the
Year 2000 challenge, the independent assessment of the
preparedness of financial institutions, testing, information
sharing, and contingency planning. In addition, the Joint Council
issues bulletins summarizing recent developments and best
practices for supervisors. Most important, the Joint Council is
completing a second round of regional meetings that focus on
contingency planning, event management, and public communications
strategies. These meetings provide an excellent opportunity for
supervisors to discuss common interests within specific geographic
areas, to share information, and to coordinate regional plans in
anticipation of the rollover.
The Joint Council also serves as
a point of contact for various national and international
private-sector initiatives. In this regard, it has established an
External Consultative Committee to enhance information-sharing
between the public and private sectors. The ECC includes
representatives of internationally oriented organizations,
including the International Monetary Fund, the World Bank, and the
major cross-border financial utilities, such as SWIFT, for making
international payments and settling transactions. The council is
now in the process of establishing information-sharing facilities
for financial market authorities to use during the rollover
period.
Private-Sector Activity
In the international financial community, we have a highly active
private-sector that has been effective in promoting the readiness
of financial services firms and markets around the globe. As I
mentioned earlier, private-sector groups, such as the Global 2000
Coordinating Group, have been educating private-sector executives
and public-sector officials about the international interest in
the readiness of key sectors in their countries that are critical
to international commerce, such as telecommunications, power,
financial services, shipping, and transportation.
No one can declare with
certainty how the millennium rollover will unfold internationally,
and much of my information is anecdotal. However, the financial
service sector is generally perceived to be better prepared than
other sectors in almost every country. In general, I can report
that the financial firms of the developed countries, like those in
the United States, either are, or appear to be making good
progress toward being, prepared. Similarly, the financial
institutions of a number of transitional economies are well
advanced. The financial institutions that are thought to have the
furthest to go, in general, are those in countries that are least
dependent on technology. They have the greatest experience with
frequent disruptions of the type that one might expect during the
changeover period and can most easily return to manual workarounds
or other contingency plans.
During 1999, the financial
community organized a series of very successful cross-border
payment systems tests. Thirty-four separate national and
international payments systems in nineteen countries participated.
More than 500 financial institutions successfully completed
simulated Y2K transactions on systems that were forward dated to
simulate the rollover. For these tests to be successful, the
participants had to have completed all necessary Year 2000
preparations to their internal systems. It therefore seems highly
unlikely that the payment system will be the source of instability
during the century date change.
The Federal Reserve and the
Credit Union Community
Before I conclude, I want to digress to mention some of the common
interests between credit unions and Federal Reserve. First, I
would note that credit unions are important users of our payment
services and that we always look forward to working with our
customers on ways to improve our services. Each local Federal
Reserve Bank has a central product office designed to respond to
customer concerns, and we strongly desire a close, productive
relationship between Federal Reserve Banks and the users of our
payment services. Second, credit unions are subject to many
consumer regulations, and the Federal Reserve Board has
rule-writing authority for some of them. The Federal Reserve Board
periodically reviews all of its regulations, and we encourage
credit union comments during these reviews. Along these lines, we
are currently in the process of reviewing Regulation B--the Equal
Opportunity Act--and Regulation C--the Home Mortgage Disclosure
Act--and I urge you to take this opportunity to read the requests
for comment and provide your thoughts. Finally, let me note one
less-recognized service provided by the Federal Reserve--the
function cost analysis. This long-standing program provides
opportunities for depository institutions, including credit
unions, to receive custom-made reports on costs and revenues
compared with peers along functional lines. Participation in the
program simply requires that the institution submit its data to be
analyzed. There is no public identification of the institution.
Currently, more than 100 credit unions participate in the program,
and we hope to increase the number of participants.
Conclusion
Now I would like return to the main focus of my remarks today.
Although much work has been done within the United States and
around the globe in anticipation of the century date change, we
should not be complacent. There is still work to be done in terms
of contingency planning and public communication. The Federal
Reserve will continue its ongoing monitoring of progress, and I am
confident that credit unions and the NCUA will continue do their
part as well. The Federal Reserve intends to have close contact
with the markets and financial institutions through the date
change. Although we cannot know with certainty what the century
rollover will bring, we should, based on what we know today,
experience a smooth transition, perhaps even business as usual.
