Financial Update (January-March 1998)

Federal Reserve Examines Financial
Institutions on Year 2000 Readiness

T he Federal Reserve has implemented a comprehensive program to inform and advise financial institutions on the potential computer issues associated with the changeover to the year 2000. As part of its program, the Federal Reserve is currently conducting a thorough compliance preparedness examination of every bank, U.S. branch and agency of a foreign bank and service provider that the Fed supervises.

The examination program includes a review of each organization's Year 2000 project management plans in order to evaluate sufficiency, to ensure the direct involvement of senior management and the board of directors at each institution, and to monitor the institution's progress toward meeting its Year 2000 plan.

Preparing the Fed's Computer Systems

The Fed must also ensure that the computer systems at each of its District banks are Year 2000 compliant. To date, the Fed has completed computer application assessments and developed internal test plans and is currently renovating its software.

All of the Fed's computer program changes are scheduled for completion by year-end 1998. Changes to the Fed's financial services computer systems that interface with the banking industry will be completed by mid-1998. This schedule allows approximately 18 months for customer testing. Additionally, the Fed is developing contingency plans to help its customers address potential problems as the year 2000 nears.

Taking Enforcement Actions

As a bank supervisor, the Fed has worked closely with other U.S. supervisory agencies that are affiliated with the Federal Financial Institutions Examination Council (FFIEC) to alert the banking and financial industry to Year 2000 compliance concerns.

Since financial institutions rely heavily on computer systems to manage and deliver financial services electronically and since payments systems are linked with systems throughout the world, a failure of any linked system could potentially have a waterfall effect to other systems. Thus the Federal Reserve and other FFIEC agencies are working to help ensure financial institutions' systems are prepared for the century date change.

If the Federal Reserve or the other FFIEC agencies determine that a financial institution is not taking the appropriate steps to become Year 2000 compliant, the agency can use its enforcement authority to require corrective action by the institution. In late 1997 the Fed issued the first cease and desist order against a bank holding company for failing to provide its subsidiary banks with reliable information system services and for not addressing the needs resulting from the approach of the century date change. The bank's subsidiaries were also issued orders by their primary regulator.

To receive information on the Fed's century date change program, contact the local Sixth District business development office. Additional information is available in the Century Date Change News, a Fed newsletter dedicated to Year 2000 issues, and on the World-Wide Web at

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