Mr Kelly's observations on Y2K compliance and the banking system
Speech by Edward W Kelley, Jr, a member of the Board of Governors of the US Federal Reserve
System, to the Media Studies Center, New York, New York on 10 March 1999
Good Morning. My thanks to the Media Studies Center and the Freedom Forum for inviting the
Federal Reserve to participate in this meeting and, more important, for the initiative of sponsoring this
gathering to discuss what I believe to be a critically important topic. As you may know, I have
devoted a good deal of time to Y2K preparation over the last two years, and in that process I have
talked to a wide spectrum of people. I have reached the conclusion that, now that the country is at last
aggressively addressing the problem, the most important single element in our successfully navigating
through the challenges presented by the 'millennium bug' is how the public responds to it. There are
very few places in our national life where the statement that 'attitude can affect outcomes' is so
compellingly demonstrated as in the banking sector, particularly as we work to address Y2K.
You will no doubt agree that the best way to engender a strong and positive public attitude is through
open and candid discussion, which I would like to encourage by briefly addressing three key
questions. First, what are the critical components of public confidence in the banking system, and how
are the industry, its regulators, and the central bank working to earn public trust in the Y2K context?
Second, what are we confident about and what are we concerned about? When the media assesses the
financial risk element of the Y2K story, these may be appropriate places to start. And finally, what do
we hope the media will do in the coming months?
I believe there are four important elements needed for public confidence in banks and the banking
system, and each is being addressed as we prepare for potential Y2K problems. Bank customers need
to be assured
• of ready access to cash and other funds and bank services
• that their bank records are secure
• that competent and energetic government supervision is being conducted
• that deposit insurance is in place and inviolate
I want to elaborate on these elements because I believe that public understanding of the banking
industry's Y2K preparations will help maintain public confidence.
First, cash availability. We do not see any need for a vast surge in demand for cash late this year, but
if that should occur, it is the Federal Reserve's responsibility to have available whatever may be
required, and that responsibility will be met. An array of preparations are being made that will ensure
currency will be available as needed in Federal Reserve vaults. The biggest challenge we face is
getting it to the right place at the right time, and extensive advance planning is under way for that as
well.
Concerning the availability of other funds and bank services, including assurance that customer
records are secure, the federal bank supervisory authorities - of which the Fed is one - are now
completing their second inspection of every bank and thrift, some 10,600 institutions. Any problem
banks, and all banks identified as keys to systemic safety, will receive additional scrutiny throughout
this year. We are inspecting to be certain that precisely those matters I just mentioned are being
addressed. The overwhelming majority of institutions are reported by our examiners to be doing a
thorough preparatory job, and they will be fully ready well in advance of December 31, 1999. A
competent and energetic supervisory presence is at work, providing not only oversight, but assistance
and advice with testing, contingency plans, customer relations, and so forth.
Last but not least, the FDIC is fully prepared, and depositors are dependably insured to up to
$100,000 per deposit.
No one can say there won't be glitches, but all of this gives us a great deal of confidence that the
banking sector will be ready. To repeat, we are confident that the overwhelming majority of banks are
carefully and thoroughly preparing themselves and that, even if problems should arise, they can and
will be readily handled, and that the financial system will not seize up or crash. A guarantee? No. An
educated confidence? Yes. Our hope is that the media will carefully check out these assertions and, if
they prove to be reasonable, report the story that way.
There are concerns, of course. Even though banks themselves are ready, other essential parts of our
infrastructure with which banks are interdependent may be less so. The challenges posed by Y2K to
the smooth operation of our computer-driven society are so ubiquitous and interrelated that it is quite
possible that not everything will be fixed that needs to be fixed in advance of December 31. More
than anything else this is a race with time. There is so much work to do that there may not be enough
time left for everyone to complete all of the tasks that they well know need to be completed. We don't
have as much information about preparations internationally, and some countries are apparently only
now beginning to seriously address the issue. We do not believe this will seriously affect worldwide
financial activity, but it could result in some disruptions abroad.
These concerns make contingency planning crucial across all of our economy, but they are all matters
that we know, at least in the technical sense, how to address. From our vantage point, another
important concern is the possibility of our citizenry becoming so overly worried about what might
happen that there could be created the very type of problem we are working so hard to prevent.
Many people would like to have an ironclad guarantee that there will be no Y2K disruption, but that
guarantee is simply not available. We cannot know in advance exactly how the millennium rollover
will go. The truth is that no one can guarantee that everything will work perfectly even later this
morning, but we do have every confidence that it will. That should be a message of reassurance, not
of concern, and it is a good perspective on Y2K. Public confidence does not require that everyone
believe that everything will always work perfectly. People know that is not the case. Rather the public
needs to be confident that the information it is receiving is complete, reliable, and adequate enough
for them to take actions appropriate to their own circumstances. If given this information, we have
confidence that the public will keep the Y2K rollover in perspective, realizing it is one more
challenge we as a nation will meet.
In closing, let me spend a moment on my thoughts about what the media might consider as this story
is reported over the next 10 months. This is a rapidly evolving situation, and demands of those who
cover it an ongoing commitment to staying on top of developments, as facts here have a very short
half-life. A given condition of preparedness observed even a few weeks ago is quite likely different
today. No one should be a 'Pollyanna' about Y2K but, based on the huge amount of work being done
to prepare, it is just not responsible to be a 'Chicken Little' either. We do not expect the sky to fall.
Let's not let 'experts' make unproved assertions, or offer personal opinions as facts, without
challenging the basis for them. And let's not treat isolated events as if they were a broadly general
reality.
There is much work to be done in local communities and we hope the media will be a powerful voice
in urging the public to seek legitimate information, maintain perspective, and act with common sense.
Suggest calm attentiveness to preparations. Provide 'how to' pointers and advice. Focus on
contingency planning. Suggest and highlight sensible actions by small businesses. Encourage
community leadership. Promote education about the problem. Hold opinion leaders and public
services providers accountable for accurate, consistent flows of information. Accept that certain
things are unknowable and do not agonize over that - we deal with uncertainties every day without
loss of confidence. If glitches occur or problems loom, report fully on them of course, but make sure
to place the problem in an appropriate context. Balance and perspective are key.
Y2K gives reporters an extraordinary opportunity to do what they do best - learn the facts, weigh the
evidence, and inform the public. You have a nation of attentive readers and listeners who very much
trust your expertise, and who will prepare for the rollover with your perspective in mind. Complete
and reliable information is every bit as important to our country's success in preparing for Y2K as is
all of the technical work being done.