commercial software producers also have been busy, and new software products are becoming available to aid programmers in repairing code. i hope and believe people are availing themselves of these new resources. to paraphrase an old adage, “ we have brought the y2k horse to water, and he appears to be drinking! ” as far as financial institutions are concerned, i am encouraged by the progress that has been made over the past year, and there is every reason to be confident that our financial system will be ready. based on a review of all depository institutions completed by federal banking regulatory agencies, the vast majority are making satisfactory progress in their year 2000 planning and readiness efforts. about four percent were rated “ needs improvement ” and fewer than one percent were rated “ unsatisfactory ”. in these cases, the agencies have initiated intensive supervisory follow up, including restrictions on expansionary activities by year 2000 deficient organizations. while we can be confident institutions are addressing the problem, it is important to recognize that regulators cannot be responsible for ensuring or guaranteeing the year 2000 readiness and viability of the banking organizations that we supervise. rather, the boards of directors and senior management of banks and other financial institutions must be responsible for ensuring the institutions they manage are able to provide high quality and continuous service in january 2000. the federal reserve system has itself made significant progress on y2k issues, meeting all of the goals that we have set for ourselves. in addition to completing an initial review of the y2k readiness of all banks subject to our supervisory authority, we have renovated our own mission - critical applications, nearly completed work on all others, and are close to completion of our internal testing. as mentioned, we have opened our mission - critical systems to customers for testing with us and have progressed significantly in our contingency planning efforts. this has required much hard work on the part of many people, but it is paying off in visible ways. as in the private sector, activity to fix computer systems maintained by the federal government is intensifying. progress has been made in many areas, but the president ’ s council on the year 2000 agrees that much work still needs to be done. reviews of federal y2k programs have highlighted needed areas of improvement, and the congress has budgeted about $ 5½ billion for y2k fixes. legislation also has been enacted that would facilitate the sharing of y2k information among businesses and clarify the legal liability of reporting y2k readiness information

, and supervisors recognize that improvements in one area can benefit the other. i am sure those here today know that supervisors have spent a considerable amount of effort developing the three pillars of the basel ii capital accord to better reflect banks'evolving risk profiles and to ensure that banks maintain a strong capital cushion to withstand the kind of liquidity - risk challenges seen in today's markets. basel ii should establish a more coherent relationship between regulatory measures of capital adequacy and the day - to - day risk - focused supervision of banks, enabling examiners to better evaluate whether banks are holding prudent levels of capital given their risk profiles. as has long been the case with our regulatory capital rules, we expect that adjustments or improvements will have to be made from time to time to address market developments. there is already work underway in the basel committee on banking supervision to consider the basel ii framework in light of recent events. under basel ii's second pillar, banks are required to have an internal process for assessing capital adequacy, the icaap, to ensure that all risks are adequately captured. a bank's pillar 2 assessment should cover the full range of risks facing an institution, which of course include liquidity risks. this internal process will be subject to rigorous supervisory review. i believe that adequate stress and scenario testing for potential asset expansions arising from liquidity shocks is crucial. bank for international settlements ( 2008 ), " liquidity risk : management and supervisory challenges, " february 28. financial stability forum ( 2008 ), interim report to the g7 finance ministers and central bank governors, february 5. the third basel ii pillar, which focuses on market disclosure, is a key mechanism for banks to communicate to market participants about their risk profiles. as a strong believer in the value of information for markets, i believe pillar 3 will help market participants better evaluate banks'risk profiles and will enhance discussions between bankers and market participants about risk - management practices. to enhance these discussions, it will be important to strengthen transparency about exposures to structured credit products and securitized assets. the benefits of enhanced transparency can be even more prominent during financial turbulence, when market participants become fearful of latent risks and " surprise " losses. confidence in the risk - management practices of individual firms can be valuable in maintaining confidence in the markets in which the firms operate. finally, i would also like to mention briefly an important initiative involving more - direct central bank efforts to improve liquidity in financial markets. in