Mr. Ferguson remarks on the challenge of preparing for the Year 2000  (Central Bank Articles and Speeches, 16 Oct 98)
Central bank: fed | Type: speech | Date: 1998-10-16

Mr.

Ferguson remarks on the challenge of preparing for the Year 2000 Remarks by Mr. Roger W.

Ferguson, Jr., a member of the Board of Governors of the US Fed Reserve System, at the Global Year 2000 Summit in London on 16/10/98.It is a pleasure to speak with you today in my role as Chairman of the Join 2000 Council.

These summits are highly valuable as a forum for sharing information and fos shared sense of purpose.

Today, I would like to reinforce the importance of the Year 2000 c describe some of the work of the Joint Year 2000 Council, and suggest some actions that yo wish to undertake in order to help your firms, your countries, and the world to prepa century date change.

## Year 2000 Challenge in the Context of Current Financial TurmoilIn the past weeks we have heard much about the current challenges facing the g financial

system.

National economies and international capital markets are facing turm liquidity and risk being repriced rapidly.

Recession is impacting significant numbers of n even the world's strongest economies are facing unusual threats to continued healthy growt uncertain economic times create a difficult backdrop for keeping the appropriate level o long-term challenges, such as the Year 2000 problem.

Without in any way diminishing importance and urgency of the immediate financial challenges, I do want to emphasiz importance of giving continued attention to the challenge of completing preparations for 2000.This may seem like a somewhat arcane topic to discuss as world financial mar struggle to right themselves.

However, the current global financial upset has reminded u world is truly interdependent and that counterparty and country risks can be, and are, r quickly.

An exchange rate problem that started in a small economy in Southeast Asia has, little more than one year, created a contagion that may potentially impact the growth perfo well as financial performance, in the most highly developed industrial economies.

Simila 2000 problems, if not addressed, remedied and planned for, can have unexpected spillover efBecause of this interconnectedness, it is most urgent that we complete our Yea preparations and provide full information to the public so that markets are not surpris operate as smoothly as possible during the crossover to the new century.

It is natural to t to the immediate and very real financial problems; but those in this room, and many ot provide an important service by remaining attentive to the important task that we face in for the century date change.

## Interaction between Year 2000 and the EuroThe current economic backdrop is not the only challenge facing those of us w focus

on the Year 2000 challenge.

Most countries represented here today are also ma significant investment in preparing for the introduction of the euro.

While the introduc euro is an event to be welcomed by market participants, it does raise several interesting for Year 2000 preparations.

First, of course, is the contention for scarce IT resources and whether there are 'economies of scope' in these two projects or at least a benefit in ' doing.' The overlap between the two problems and two technical solutions is not as great would like.

At the narrowest level, they involve different approaches to the technical sol generally, the testing approaches are different, with the euro relying on operational test 2000 being more of a technical test.

Finally, Year 2000 involves embedded systems while t will not affect systems with embedded chips in most cases.There may also be contention for another limited resource, which is top manage attention.

Year 2000 was initially considered a technical problem, which many managers ma thought could be best handled by technicians.

The euro conversion is obviously a busine which entails strategy and is more accessible to the well-informed senior manager. importantly, the euro may be seen by some as having revenue potential that comes from offer services ahead of competitors.

Year 2000 may offer some revenue opportunities, but it is most correctly perceived as a cost concern for many senior managers.

Both conversions m managed as business issues because of the significant risks they both pose to operations.Some commentators may have created another, false, relationship between these technical challenges by suggesting that the Year 2000 problem is a creation of some that distract attention and resources from the euro.

I know of no responsible person who would need to spend the large sums necessary to prepare for the century date change or ri disruptions for the purpose of diverting attention from a legitimate and beneficial effort common currency for a major economic region.

In addition, computer professionals have know this problem for years and are, I believe, universal in recognizing its importance.However, the story is more complex than these elements of resource contention; are some benefits from having these two major systems changes in close proximity.

First, w learn about the importance of cross-firm coordination in tackling these systems issues in t In addition, there will be learning on how best to perform contingency planning for these cross-border events.Finally, the euro conversion experience may be seen as a leading indicator Year 2000 weekend that will follow a year later.

If things proceed well, many may interpr lessening the pressure, and efforts to prepare for Year 2000 might appear to have a lower euro conversion is not as seamless as expected, the perceptions of Year 2000 risk wi increase, possibly leading to excessive concern and overreaction.

It will be incumbe knowledgeable and balanced commentators to assess the situation coolly and point out appr similarities and differences between the two events.

## Disclosure and TransparencyOne way in which we can all ensure that balanced and rational discussion preva by

adequate disclosure and transparency.

The lack of adequate information on Year preparations by firms and countries is a significant concern because, as we have seen rec of information may feed negative perceptions in the marketplace.

The interdependence of f institutions, markets and payments systems, and the overall dependence by firms on the rea the public infrastructure, make it very important for firms and countries to share informa status of plans and preparations.The Year 2000 problem could potentially lead to a cross-border reassessmen counterparty and country risks similar to that occurring now.

Unless we continue to mak progress in preparing for the century change and communicate clearly how we are doing, w experience what I call the 'Year 2000 shadow' in the financial markets.

Financial participants, and entire countries, may find that capital will become scarce, or at least are not seen to be making sufficient progress toward resolving this problem.

The unc surrounding preparedness for Year 2000 may make markets less liquid as institutions seek to themselves from risk with counterparties who are thought to be unprepared.

The financial co is not clear, and I am not one of those forecasting recession as a result of a Year 2000 we know from recent events that a flight to liquidity can have severe repercussions i economy.In the United States, legislation has recently been passed by Congress to prote that share information in good faith on the status of their Year 2000 projects.

In Ju Securities and Exchange Commission issued new guidance for publicly traded companies requ them to disclose information regarding the scope of their Year 2000 problem and the statu Year 2000 readiness.

These actions are intended to prompt firms to be more forthcomi providing information so that firms and investors may respond appropriately.

While disclos like those mandated by the SEC are a positive development, the Year 2000 process it constantly evolving, so formal disclosures will almost certainly be months behind the marke accessing the status of firms.Voluntary disclosure, therefore, must form an integral part of plans.

Firms forthcoming and disclose their status in forums like the Global 2000 meetings set an exa other firms in their countries and provide the marketplace with vital information.

In States, the oil and gas industry associations recently surveyed their members on the company readiness.

While the survey revealed that 45 per cent of the respondents are st assessment phase, there has been no negative reaction in the marketplace or in the public p information.

One probable reason for this reaction is that the survey and public disclosur message that companies have recognized the risks and have implemented programs and resou necessary to address the Year 2000 problem; information is reassuring.

## The Joint Year 2000 CouncilThe

Joint Year 2000 Council is providing a complement to these private se efforts.

We do not represent the global 'official sector', but we are attempting to coo share information among the world's financial regulators.

To that end, we have issued a n policy papers to provide regulators with a strong sense of better practice.

The Council al information through a bulletin and a website.

We also plan to sponsor a series of regiona before the end of the year to bring together regulators at a regional level to discuss pr provide solutions to challenges.

Finally, we have held conversations with senior member private sector who are members of our External Consultative Committee to impress upon the important role that they play in making these preparations.Early in its life, the Joint Year 2000 Council issued a statement emphasiz importance of each country's developing a national Year 2000 strategy, including having government coordination.

In the United States we have created a President's Council, whic example of government coordination of Year 2000 preparations.

This has been a particularly tool for allowing further information sharing and disclosure, as well as speeding preparatiIn spite of these efforts and examples of good practice, some countries will not be as prepared as we would hope.

Time will run out for a few; however, that should not countries and firms from continuing their best efforts.

It is never too late to start t process, focused in the first instance on the most critical systems, and working diligentl highest level of preparation possible.

The risks of some disruption to international trade markets are certainly not negligible, but these risks can best be handled by continued har by planning for current and likely contingencies.

## Plan of ActionAs we move forward, I would like to suggest some steps we can all take.First, you and your colleagues are critical in continuing to build awarenes your financial and business communities and within your countries, about the importance of on the Year 2000 so this event does not become the next crisis impacting financial markets.Second,

some governments do not yet fully appreciate the magnitude of the Y 2000 problem.

The Joint Year 2000 Council has an active program to raise awareness a financial regulators worldwide and to share information on important Year 2000 tasks.

Y assist these efforts by raising the topic with political and regulatory leaders in count your firms are active and providing your market-based sense of the risks.Third, I believe that accurate and timely information is the best antidot misinformation that is likely to spread as we get closer to the critical dates.

I woul strongly encourage the efforts like those currently under way by Global 2000 to obtain disclosure of information about the status and readiness of firms.

I expect that market and the public at large will start to expect more information, and those that do not disc risk of being considered unprepared for the Year 2000 transitions, raising business viabili systemic concerns.Fourth, the 'dependencies' in the public infrastructure that we all have, telecommunications, power, and water, need further attention.

This is a vital link that increasingly obvious.

I would encourage you to have conversations with your utiliti telecommunications providers, and with appropriate regulatory authorities, about preparedne industries that are vital in operating the public infrastructure.

Utilities have bee cautious in explaining their preparedness.

More disclosure from them would be useful.Finally, an important and responsible part of any project includes conti planning.

Contingency planning should be recognized as a legitimate exercise, not an admis you expect failure in the core effort of preparing for Year 2000.

## ConclusionIn closing, let me say that we have achieved much in the past few months.

The of awareness and appreciation for the seriousness of the risks posed by the Year 2000 i every day.

For example, despite many competing issues and concerns, the Year 2000 was addr during the recent meetings of the IMF and World Bank.

The Joint Year 2000 Council is comm to accomplishing its goals of sharing information and helping supervisory authorities per duties.

We also remain committed to work with our colleagues in Global 2000 as they encour private sector to take responsibility for their preparations.

We must also continue to w encourage governments and companies that provide public infrastructure services to prepare Year 2000.

Finally, we should all encourage disclosure and sharing of information by fi governments.I am confident that the current business and technical headlines, whether they international financial contagion or euro conversion, will continue to receive the appropr private-sector and official attention.

However, the clock will march inexorably forward, the next fourteen months we will all know how prepared we collectively are for the cent change.

With concerted effort, I hope that we will not be found wanting.