Mr. Meister reports on the Year 2000 problem from the perspective of German banking supervisors  (Central Bank Articles and Speeches, 30 Oct 98)
Central bank: ecb | Type: speech | Date: 1998-10-30

Mr.

Meister reports on the Year 2000 problem from the perspective of German banking supervisors Luncheon speech by Mr.

Edgar Meister, a member of the Directorate of the Deutsche Bundesbank, at the Year 2000 meeting of European central and financial regulators organised by the Joint Year 2000 Council and the Deutsche Bund in Frankfurt/Main on 30/10/98.II am pleased to contribute to this conference on the Year 2000 and how millennium date change poses a very significant risk for financial institutions and markThe media have now been reporting regularly, and sometimes with flas headlines, on the many problems which the Y2K problem or 'millennium bug' can pose to economy and public administration.

One has visions of planes crashing, assembly lines to a standstill, pensioners being asked to register for school, babies receiving old contracts becoming null and void, or deliveries being interrupted.We are all well aware that the Year 2000 problem impacts on the whole econo and the public administration.

Therefore, joint action must be taken now if we are potentially serious problems down the road.Acting in my role as a central banker and as chairman of the Banking Superv Committee of the European Central Bank, my primary concern is on the role fina institutions play in this context.

That is why I want to take this opportunity to giv overview on the implications of the problem on the financial sector and a brief summar measures taken by German banking supervisors to promote and intensify the necessary 2000 preparations.IIIn the banking and insurance sectors, the impact of systems being insuffi Year 2000 compliant can be particularly drastic.

Some vivid examples are the possib interest and redemption payments on loans being calculated inaccurately, statements of and insurance periods being updated incorrectly, cheques and credit cards being rej ATMs (automated teller machines), and futures contracts being cancelled.However, the more pressing risks are to be found in the danger that pay systems might collapse, liquidity bottlenecks might occur, and the number of credit might increase, owing to Year 2000 problems on the part of banks' customers.

For this banking supervisors have alerted the banking industry to the possibility of significant customers' behaviour occurring at the end of 1999 as far as their demand for cash goes. public confidence in the ability of the financial sector to solve the Year 2000 pro trigger increased withdrawals of deposits and demand for cash.The particularly close technical and financial interdependency within the b sector, as well as with all sectors of the economy (owing to the banks' corporate c makes it necessary to take particularly comprehensive action.

Not only must the bank systems be reassessed but also the Year 2000 preparations being made by their business pThere is a further factor that compounds the situation:

Germany and the member states of the forthcoming European Monetary Union must deal with the dual chall of preparing their computer programs for the changeover to the single European currencthe same time take the necessary preparations for the century date change.

Numerous p show up here, and what we nowadays call 'synergy effects' are the result.

They will s limited, yet they do clearly exist, such as in cashless payments.For one thing, there is a heightened awareness of how to handle such c country and cross-system conversion processes, for which there is hardly any hi precedent.

For another, completely new procedures such as the cross-border TARGET sys have been developed.

In these systems, it was possible to take timely account of the c to the Year 2000, which will take place in 427 days.

The absolute necessity of prepar systems anew for the euro has allowed the Bundesbank and the credit instituti simultaneously make virtually countless EDP systems in the accounting sections and offices' Year 2000 compliant.The practical experience which must almost inevitably be gained during weekend of the changeover to the euro from 1998 to 1999 will also provide welcome knowl that can be used for the century date change.

It will probably once again become clear involved that the interplay of different systems can be different in real life than in however realistic it may be.

The Year 2000 changeover has a different type of complex the introduction of the euro, since there is an interaction between different EDP ap system components and external software components, as well as processor-driven sys Substituting the euro for the DM will involve the organisation of workflows and op procedures; in computer-related terms, that means new software must be installed.

Howe the changeover from December 31, 1999 to January 1, 2000, the hardware components of EDP systems, i.e. the nearly innumerable number of chips, must be transformed.The Bundesbank and the credit institutions, which were already required to pioneering role when the euro was introduced, are again forced to play a key role in financial sector ready for the millennium date change.

Responsibility for the overall c of the exchange of information and ideas on this problem among the various sectors of though, is in the hands the Federal Government. (To this end, the Federal Ministry of E has set up, among other things, a Year 2000 expert group in its ministry, in which repr of the most important sectors of industry and administration affected by the problem ar participating.)

## IIIWhat measures are German banking supervisors taking to help the financial s achieve a successful crossover to the new millennium?German banking supervisors do not and cannot even dare to guarantee that b will be fully compliant; rather the emphasis is on ensuring that- banks' senior management have focused on the scale of the problems fac their institution,- they are taking responsibility for solving them,- the banks systematically plan the relevant projects and implement them timely manner, and- they

have contingency plans in place to rectify any slippage or s failure.Since the beginning of their Year 2000 activities in 1994-95, and particular 1997, the Bundesbank and the Federal Banking Supervisory Office have been leaning onbanking industry to press ahead with its Year 2000 preparations with great intensity. the state of the banking industry's preparations for the Year 2000 is also a major fo ongoing banking supervision.On-site validation procedures through independent auditors during audits banks' annual accounts for as early as the year 1997 constitute one important point.

An important action is a Year 2000 survey conducted in June 1998.

The Federal Ban Supervisory Office and the Bundesbank asked all the approximately 3,600 credit inst under supervision and 200 stockbrokers in Germany about their Year 2000 preparations analysis of the preparations is supplemented by personal discussions of banking supervi individual credit institutions, particularly those having branches and subsidiari Immediate actions are taken where the existence of the institution is in jeopardy insufficient preparations for the Year 2000.With regard to the timetable, German banking supervisors have not set any of target dates, yet they have made it perfectly clear in discussions and surveys that testing of these systems should be completed by mid-1999.

This target date will also b the final prudential assessment of the state of preparations of individual credit instiAlthough legal problems, particularly liability issues, are being given i attention in connection with the Year 2000 problem, no legislative changes are curren envisaged, because the legal system is flexible enough to cope with these problems.Ladies and gentlemen, the turning of the clock at midnight on December 31, cannot be postponed - as you all know.

Time is a scarce asset with regard to the preparations.

As all credit institutions are depending on each other to be sufficiently issue is hardly a factor of competition.

On the contrary, an exchange of experi information is crucial in order to enhance the efficiency of the changeover work.

Ther Federal Banking Supervisory Office and the Deutsche Bundesbank have been playing a proa role in coordinating the efforts across the financial institutions: at their instigat Credit Committee ( ZKA ) established a forum comprising several banking associations exchanging experience on the Year 2000 problem at the expert level.

The Federal Ba Supervisory Office and the Deutsche Bundesbank are involved in the forum's work.Supporting the banking industry in its efforts to solve the Y2K problem ongoing process that will continue until the crossover takes place.

Nevertheless, I mu that the ultimate responsibility lies with the management of the individual in themselves.

This is why handling the Year 2000 problem responsibly is a criterion Federal Banking Supervisory Office when assessing whether or not banking business is conducted properly.IVI could go on and on about the supervisory aspects of the Y2K problem.

Howe a luncheon speech does not seem to be the appropriate setting to go into too much detaiFurthermore, when I look at the impressive programme of this conference seems to me that all the important elements of this topic will be covered by this mor afternoon's panels.However, looking at a lunch as a social event, one aspect of the Y2K pro comes to my mind that is not covered by today's programme and that might be worth bring your attention - if nothing else, at least as a potential problem in the course of th change that deserves thought.

Let me call it the social aspect of the Y2K problem.New Year's Eve 1999/2000 will be a social event of major proportions, accor to some people even an event of biblical significance.

Millions of people will drive e of many organised New Year's parties or to pay a visit to relatives or friends in order the new millennium.

Are you aware of the fact that there are about 30 different dataembedded chips in a modern-day automobile?Getting to the parties before midnight should not be a big problem.

How imagine what will happen to the mood of the parties if cars stop working after the m date changes, which would mean the parties would have to continue, but the second an glasses of champagne would only be lukewarm at best because all the refrigerators ar order?VHowever, looking at some humorous side effects of the problem does not mak any less serious for society in general.

Looking at the international banking system as believe that we have already made considerable headway in limiting the possibility t disruptions will have systemic consequences for our markets.

However, we must all cont work hard in the time remaining to ensure that the existing threat can be averted to possible extent.In that spirit, ladies and gentlemen, I would like to conclude my remar commend the Joint Year 2000 Council for organising such regional conferences.

They account of the fact that in a globalised economy, a worldwide effort is necessary to s face the challenges of the Year 2000 computer problem.