Located organizationally within the Department of the Treasury, the Office of Thrift Supervision through its five regional offices supervises 1,210 federal and state chartered savings institutions—commonly called thrifts—to maintain the safety, soundness, and viability of the industry. Thrifts primarily emphasize residential mortgage lending and are an important source of housing credit. Most of these institutions have assets of under $500 million and are locally owned and managed. Together, they are responsible for about $770 billion in assets. As part of its goal of maintaining safety and soundness, OTS is responsible for examining and monitoring thrifts’ efforts to adequately mitigate the risks associated with the century date change. To ensure consistent and uniform supervision on Year 2000 issues, OTS and the other regulators coordinate their supervisory efforts through FFIEC. For example, the regulators jointly prepared and issued an August 1996 FFIEC letter to banks, thrifts, and credit unions informing them of the Year 2000 problem and its potential adverse impacts. Together, they also developed and issued in May 1997 an FFIEC examination program and guidance on how to use it. More recently, the regulators established an FFIEC working group to develop guidance on mitigating the risks associated with using contractors that provide automated systems services and software to thrifts. According to OTS, virtually every insured financial institution relies on computers—either their own or those of a third-party contractor—to process and update records and to perform a variety of other functions. Because computers are essential to their survival, OTS believes that all its institutions are vulnerable to the problems associated with the year 2000. Failure to address Year 2000 computer issues could lead, for example, to errors in calculating interest and amortization schedules. Moreover, automated teller machines may malfunction, performing erroneous transactions or refusing to process transactions. In addition, errors caused by Year 2000 miscalculations may expose institutions and data centers to financial liability and loss of customer confidence. Other supporting systems critical to the day-to-day business of thrifts may be affected as well. For example, telephone systems, vaults, and security and alarm systems could malfunction. In addressing the Year 2000 problem, thrifts must also consider the computer systems that interface with, or connect to, their own systems. These systems may belong to payment system partners, such as wire transfer systems, automated clearinghouses, check clearing providers, credit card merchant and issuing systems, automated teller machine networks, electronic data interchange systems, and electronic benefits transfer systems. Because these systems are also vulnerable to the Year 2000 problem, they can introduce errors into thrift systems. In addition to these computer system risks, thrifts also face business risks from the year 2000, that is, exposure from its corporate borrower’s inability to manage their own Year 2000 compliance efforts successfully. Consequently, in addition to correcting their computer systems, thrifts have to periodically assess the Year 2000 efforts of large corporate customers to determine whether they are sufficient to avoid significant disruptions to operations. OTS and the other regulators established an FFIEC working group to develop guidance on assessing the risk corporate borrowers pose to thrifts. OTS has taken a number of actions to raise the awareness of the Year 2000 issue among thrifts and to assess the Year 2000 impact on the industry. To raise awareness, OTS formally alerted thrifts in August 1996 to the potential dangers of the Year 2000 problem by issuing an awareness letter to thrift chief executive officers. The letter, which included a statement from the interagency Federal Financial Institutions Examination Council, described the Year 2000 problem and highlighted concerns about the industry’s Year 2000 readiness. It also called on thrifts to perform a risk assessments of how systems are affected and develop a detailed action plans to fix them. In May 1997, OTS, along with the other regulators, issued a more detailed awareness letter that described the five-phase approach to planning and managing an effective highlighted external issues requiring management attention, such as reliance on vendors, risks posed by exchanging data with external parties, and the potential effect of Year 2000 noncompliance on corporate borrowers; discussed operational issues that should be considered in Year 2000 planning, such as whether to replace or repair systems; related its plans to facilitate Year 2000 evaluations by using uniform examination guidance and procedures; and directed thrifts to (1) inventory core computer functions and set priorities for Year 2000 goals by September 30, 1997, and (2) to complete programming changes and to have testing of mission-critical systems underway by December 31, 1998. As of November 30, 1997, OTS had completed its initial assessment of all thrifts for which it has supervisory responsibility. In conducting this assessment, OTS performed off-site examinations of the thrifts that addressed whether (1) their systems were ready to handle Year 2000 processing, (2) they had established a structured process for correcting Year 2000 problems, (3) they prioritized systems for correction, (4) they had determined the Year 2000 impact on other internal systems’ important to day-to-day operations, such as vaults, security and alarm systems, elevators, and telephones, (5) they had estimated Year 2000 project costs and targeted sufficient resources, (6) their milestones for renovating and testing mission-critical systems were consistent with those recommended by FFIEC, and (7) they had been closely tracking the progress of service bureau and vendor Year 2000 remediation efforts. Thrifts were also asked to submit Year 2000 assessment reports, action plans, and their most recent progress reports. According to OTS, this assessment showed that the thrift industry was generally aware of and addressing the potential impact of Year 2000. For example, 94 percent of thrifts had assigned Year 2000 oversight duties or a senior officer or committee and 90 percent were then developing a Year 2000 action plan. However, OTS did find that about 170 thrifts were designated at high risk due to poor performance in conducting awareness and assessment phase activities. OTS is following up on this initial assessment with on-site exams to all thrifts to be completed by the end of June 1998. To help thrifts prepare for these visits, OTS developed a detailed Year 2000 checklist. It is a self-assessment tool addressing the five phases of the Year 2000 correction process and about 10 other areas, including reliance on vendors and borrowers’ credit risk that informs thrifts of key activities to be performed and allows them to quantify their progress. OTS also issued additional examination guidance and procedures to supplement those of the FFIEC. This supplemental guidance, if implemented correctly, will address the FFIEC examination procedure shortcomings (i.e., lack of detailed questions, vague terminology) reported in our previous testimony. To ensure OTS completes the on-site visits by June 1998, each regional office has been given the authority to establish its own plans for assessing institutions. OTS’ national Year 2000 coordinator is currently reviewing regional plans to assess their reasonableness. To make sure regions stay on track, the coordinator is monitoring regional progress in completing the on-site reviews on a biweekly basis and, starting in April, on a weekly basis. More recently, on March 13, 1998, OTS issued a memorandum to the regional offices that, among other things, reiterated its supervisory goal of ensuring that the thrift industry becomes Year 2000 compliant and provided guidance on exam followup for thrifts assigned a Year 2000 rating less than satisfactory. OTS has also been participating with other regulators to conduct on-site Year 2000 assessments of major data processing servicers and software vendors. These servicers and vendors provide support and products to a majority of financial institutions. OTS and the other regulators expect to complete their first round of servicer and vendor assessments in April 1998. OTS is providing the results of the servicer assessments to OTS-supervised thrifts that use these services. Together with the results of on-site assessments conducted at thrifts, OTS expects to have a better idea of where the industry stands, which thrifts need close attention, and thus where to focus its supervisory efforts. As noted in our summary, OTS must successfully address a number of issues to provide adequate assurance that the thrift industry will meet the Year 2000 challenge. Also noted, these issues for the most part are similar to those we found at FDIC and NCUA. First, like the other regulators, OTS is behind in assessing individual institution’s readiness. As with NCUA and FDIC, OTS got off to a late start assessing the readiness of the institutions it oversees and, consequently, was late in completing assessment phase activities. For example, it did not complete its initial assessment of all thrifts until November 1997. According to OMB guidance and our Assessment Guide, these activities should have been completed by the summer of 1997. Because OTS is behind the recommended timelines, the time available for assessing institutions’ progress during renovation, validation, and implementation phases and for taking needed corrective actions is compressed. Second, OTS and the other regulators are still developing key guidance to help institutions complete their Year 2000 efforts. In their May 1997 letter to thrifts, banks, and credit unions, the financial regulators recommended that institutions begin (1) developing contingency plans to mitigate the risk that Year 2000-related problems will disrupt operations and (2) ensuring that their data processing services, software vendors, and large corporate customers are making adequate Year 2000 progress. In recommending these measures, the regulators noted that they have found that some financial institutions were heavily relying on their service providers to solve their Year 2000 problems. They outlined an approach for dealing with vendors that included (1) evaluating and monitoring vendor plans and milestones, (2) determining whether contract terms can be revised to include Year 2000 covenants, and (3) ensuring that vendors have the capacity to complete the projects and are willing to certify Year 2000 compliance.