Mr Ferguson assesses financial sector Y2K readiness in the United States
and abroad with less than 100 days to go
Remarks by Mr Roger W Ferguson Jr, Member of the Board of Governors of the US Federal Reserve
System and Chairman of the Joint Year 2000 Council, before the Wallenberg Forum at Georgetown
University, Washington, D.C., on 28 September 1999.
* * *
Year 2000: ninety-four days and counting
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 US 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 US financial industry and other sectors
With only ninety-four days remaining before the century rollover, I believe that the US financial sector
is ready. My assessment is based on publicly available facts and information developed by supervisors
and industry participants. More than 99% 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.
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. These tests revealed Y2K errors at a level of something less than one-tenth of 1%,
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, 1-2% 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 US
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 30 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% of the nation's electricity needs were ready for the Year 2000. Similarly, as
of July 1999, long-distance telecommunications carriers controlling 92% of domestic calls were 99%
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 counterparties. 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 to have reasonable plans in place to
manage cash and liquidity and provide for contingencies over the century date change. However, we
also recognize our responsibility to assure that adequate overall levels of liquidity are available and to
provide a backstop to the financial system.
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 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 US markets respond positively to the announcement of these tools.
Even with the flexibility provided by these tools, if the markets become more volatile, it may be
difficult 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 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 1 October 1999 through 7 April 2000. It will be
available to depository institutions operating in the United States and in sound financial condition.
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 under the SLF will not be required to first seek credit from market sources, and
the usage 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. If banks are willing to utilize the
facility, it should help to maintain orderly markets and to cap the federal funds rate in those markets.
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 website. The Center will also publish reports on the impact of the
date change on critical sectors within countries during the rollover period. The website 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 market - the Joint Year
2000 Council - was established by the Basel 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 S.W.I.F.T., 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 telecommunication,
power, financial service, 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 Year 2000
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 systems will be the source of
instability during the century date change.
Conclusion
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. We also intend to have close contact with the markets and financial
institutions through the date change. While 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.