Financial Update (July-September 1999)

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Cover Story

Bureau of Public Debt Ends Window Services

Revisions Clarify Reg Z

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The Docket

Fed Makes Y2K Cash Plans, Encourages Banks to Plan

T he Federal Reserve has devoted significant resources to help the nation's financial system successfully navigate the rollover to the Year 2000. Part of the Fed's efforts have been focused on ensuring there is sufficient currency available at the end of 1999 to meet any potential increase in demand from financial institutions and the public.

Circulating Additional Currency

Although no major or prolonged difficulties accessing currency are expected, the Fed recognizes that consumers may hold extra cash during the century rollover period to make routine household purchases such as food and gas. While the Fed believes that all payments systems — including checks, automated clearinghouse transactions, credit and debit cards, and cash — will work during the Year 2000 transition, the Fed stands ready to issue more currency into circulation when, and if, such demands occur.

Cash fan
Just in case additional cash is needed, the Federal Reserve has significantly increased its currency order for 1999 from the U.S. Treasury.

Just in case additional cash is needed, the Federal Reserve has significantly increased its currency order for 1999 from the U.S. Treasury and its Bureau of Engraving and Printing, which prints currency. This increase includes just over $50 billion for domestic contingency and $20 billion for international contingency purposes. The Fed, which normally holds approximately $150 billion in reserve, estimates that the substantially higher amount of currency in reserve — approximately $200 billion — will more than adequately meet demand near year's end.

Although the Fed is preparing to meet these potential greater demands for cash, it believes that consumers are unlikely to hold a significantly higher proportion of their wealth in cash during the century rollover than they normally do because such a move would be costly. The Fed believes that most people will continue to keep their savings in insured bank deposits and interest-bearing accounts rather than at home.

On the Year 2000

Communicating With Customers

Communications are a shared responsibility. Research tells us that customers want to hear directly from their bank and that the public is interested in specifics, not generalities, about preparations. The Federal Reserve is expanding its program of outreach, with every Reserve Bank working on an aggressive program of local communication. I urge you to do the same. The public needs to know that the Year 2000 is like other challenges we have met through careful preparation, risk reduction and contingency planning to allow us to work around any problems that might occur.
ROGER FERGUSON JR., BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
REMARKS BEFORE THE NATIONAL AUTOMATED CLEARINGHOUSE ASSOCIATION, ATLANTA, GA., APRIL 13, 1999

Inventory Management and Y2K

As the millennium approaches, I expect businesses will want to hold larger inventories of goods as insurance against Y2K-related supply disruptions. Such a shift from "just-in-time" inventory management to a "just-in-case" posture is likely to promote an increase in orders and production during late 1999, with these stocks subsequently being run off in the first half of 2000. We at the Fed, for example, will do precisely that in our management of the production of new currency.
EDWARD W. KELLEY JR., BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
REMARKS TO THE OWENS GRADUATE SCHOOL OF MANAGEMENT, VANDERBILT UNIVERSITY, MARCH 25, 1999

For more information on the century date change, see the Federal Financial Institutions Examination Council's site on the World Wide Web at www.ffiec.gov/y2k/default.htm. This site has links to information about the century date change efforts of the five U.S. banking regulators.

About two-thirds of all U.S. currency is held outside the United States. The Federal Reserve is planning to have enough currency available to at least equal the past highest monthly U.S. currency inflow to each country. This total reflects the amount of U.S. currency that each country can absorb in a given period and should more than adequately meet foreign demand.

In addition to placing a larger currency order, the Federal Reserve will take steps to ensure that financial institutions will be able to obtain currency in a timely manner to meet the needs of customers during the rollover to 2000. If necessary, the Fed is prepared to extend the hours of its cash departments or take other operational steps to fill currency orders. Questions about the adequacy of the currency supply can be addressed with the cash officer at a local Federal Reserve office. More information on the Fed's plan is forthcoming later this year.

Banks Should Create Cash Contingency Plans

Although Federal Reserve Banks plan to have extra currency in their vaults and are willing to implement extended work hours to accommodate unforeseen cash needs during the Y2K transition, each financial institution must launch its own contingency planning effort to be ready to meet its customers' demands.

To help banks prepare, the Federal Reserve has issued cash tips for banks. Each institution should consider its sources of liquidity and review both its assets and liability structure to determine how to meet additional cash demands. The Fed recommends that the depository institution's plan should address, at a minimum, the following issues:

  • the nature of its customer base, including retail or individual accounts, and an estimate of additional cash needed to meet the potential spikes in demand;
  • periods when increased demand for cash may be expected and the need to order more cash than usual from the Federal Reserve during these periods;
  • a review of vault capacity, insurance limits, bond requirements, etc. to ensure it can handle additional cash holdings and appropriate distribution and shipping requirements;
  • a review of ATM locations and the need to replenish ATMs with currency more frequently during the Y2K transition as well as verification that ATMs are Y2K compliant; and
  • a review of contingency plans of related vendors such as armored carriers and correspondent banks to ensure that adequate support will be received from them during the Y2K transition.

Promoting the Safety of the Currency Supply

As part of the banking industry's proactive stance on Year 2000 issues, financial institutions can play an important role in reassuring customers that the nation's money supply is not in jeopardy. All financial institutions should consider a communications campaign focusing on the safety and soundness of money deposited in banks, credit unions and savings and loans. An important component of that message is that customer deposits are insured to the legal limit by the Federal Deposit Insurance Corp. and National Credit Union Administration and will be fully accessible during the transition to 2000.

Year 2000 Readiness Disclosure