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 banks and financial regulators organised by the joint year 2000 council and the deutsche bundesbank in frankfurt / main on 30 / 10 / 98. i i am pleased to contribute to this conference on the year 2000 and how the millennium date change poses a very significant risk for financial institutions and markets. the media have now been reporting regularly, and sometimes with flashy headlines, on the many problems which the y2k problem or “ millennium bug ” can pose to the economy and public administration. one has visions of planes crashing, assembly lines coming to a standstill, pensioners being asked to register for school, babies receiving old age pensions, contracts becoming null and void, or deliveries being interrupted. we are all well aware that the year 2000 problem impacts on the whole economy and the public administration. therefore, joint action must be taken now if we are to avoid potentially serious problems down the road. acting in my role as a central banker and as chairman of the banking supervision committee of the european central bank, my primary concern is on the role financial institutions play in this context. that is why i want to take this opportunity to give you a short overview on the implications of the problem on the financial sector and a brief summary of the measures taken by german banking supervisors to promote and intensify the necessary year 2000 preparations. ii in the banking and insurance sectors, the impact of systems being insufficiently year 2000 compliant can be particularly drastic. some vivid examples are the possibility of interest and redemption payments on loans being calculated inaccurately, statements of accounts and insurance periods being updated incorrectly, cheques and credit cards being rejected by atms ( automated teller machines ), and futures contracts being cancelled. however, the more pressing risks are to be found in the danger that payment systems might collapse, liquidity bottlenecks might occur, and the number of credit defaults might increase, owing to year 2000 problems on the part of banks ’ customers. for this reason, banking supervisors have alerted the banking industry to the possibility of significant changes in customers ’ behaviour occurring at the end of 1999 as far as their demand for cash goes. a lack of public confidence in the ability of the financial sector to solve the year 2000 problem could trigger increased withdrawals of deposits and demand for cash. the

liberalization strategy is to ensure strengthening of the domestic system, and allow gradual opening of the banking sector. this will mean new entries into the system, as well as more intensified competition between existing players. the phasing of this process will be consistent with continued economic and financial stability. the banking system must be prepared for greater competition. improved risk management framework will be the critical success factor for banks'ability to meet future challenges. these include the adoption of ias 39, currently underway, and the new basel capital accord at the end of next year. we realize that these reforms pose a major challenge to the banking system in thailand as in the global market. however, the process of policy consultation and dialogue with the banking sector has assured us that banks are able to cope, although some more so than others. nevertheless, ias 39 will improve the transparency and provision buffer against impaired assets, while basel ii has already raised the standard of risk management that will be absolutely crucial going forward. in summary, we are moving in the right direction and are in a good position to build on this reform and to consolidate our progress. how well - founded is our confidence? as you know, we are currently undergoing the financial sector assessment programme or fsap with the imf and the world bank, which assesses the supervisory process and financial sector soundness. preliminary findings on our compliance to the bis core principles of banking supervision are favorable, with the results mostly fully compliant and largely compliant. all in all, thailand's supervisory system compares well to international best practices. the only exception, as we all know, has to do with the inadequacy of the current legal infrastructure that provides for the central bank's autonomy and explicit supervisory power in key areas. i must thank the tremendous effort and cooperation made by the banking sector throughout the whole fsap process thus far. the next phase of the process will involve the stress test analysis of the banking system, which again, will require your cooperation. the value of this exercise is not only to confirm our strength, but also to help guide us to areas of improvement that can safeguard us against future challenges. you can expect more improvements in our supervisory system in the months and years ahead, especially after the new financial institutions businesses act is enacted. ladies and gentlemen, the economy and the banking system have come a long way to reach this point, where we are able to remain resilient against many difficult challenges. such ability, to a large extent,