The Federal Reserve - the central bank of the USA - has summoned international financial regulators to a crisis meeting next April in an attempt to produce a global strategy to avoid the threat of a recession caused by the collapse of computer systems in the year 2000.
Federal Reserve governor Edward Kelley told the Professional Bankers Association conference in Washington that the Millennium Bug was a global problem. As such he warned attendees at the meeting not to assume that their companies would survive just because US institutions had upgraded their systems to become Year 2000 compliant.
"We intend to be as prepared as is humanly possible, and believe that most U.S. banking institutions will be, as well. So will the central and private banks of various other countries," he told them. " But we would be greatly comforted if this were the outlook for every nation, and for every industry. At this time, that is not the prospect.
"Early in 1996, the Federal Reserve began to have concerns about international progress on the Year 2000," he went on. " Informal discussions within the Bank for International Settlements (BIS) Committee on Banking Supervision indicated that the Year 2000 was not then a priority in many countries. Reportedly, many foreign banks continue to be less focused on the Year 2000 than prudence might suggest."
There is no room for complacency, he warned his audience. "The global nature of today's financial services industry relies upon the interconnection of computer systems worldwide," he reminded them. "We fear that on a worldwide comprehensive basis, we are far behind where we should be and the days are inexorably going by. The problem is global and must be solved worldwide or all will suffer.
"The Millennium Bug, or Year 2000 problem, has the potential to seriously disrupt the infrastructure of computer systems and telecommunications that the world community depends upon for the free flow of funds and payments and hence, virtually all of everyday commerce?With the linkage of payment systems globally, a failure of any linked system could have waterfall effects to other systems and a disastrous result to the world economy."
He outlined a potential disaster scenario to illustrate his point. What if, he asked, the computers in financial services organizations cannot deliver payments to counter parties, or receive funds from them and then gridlock ensues? There would, he predicted, be a collapse in financial markets because of the bad news coming from companies about their inability to trade normally.
A number of financial institutions have already begun predicting that the Year 2000 issue will lead to a recession in the US and the global economies. For example, Deutche Morgan Grenfell predicts a 40% probability of mild recession by the Year 2000. It warns that the start of the new century will see a period of merger and acquisition as those companies which fixed their systems gobble up those which did not. This could lead to fewer jobs.
Kelley went on to highlight how the Federal Reserve is putting its own house in order. The Reserve has several payments applications that process and settle payments and securities transactions between depository institutions in the US.
These include three of the most crucial to the financial infrastructure of the US: Fedwire funds transfer, used by 10,000 depository institutions to transfer $280 trillion of securities each year; Fedwire securities transfer, used by 8000 institutions to transfer $160 trillion; and Automated Clearing House (ACH) which is used by approximately 14,000 financial institutions, 400,000 companies, and an estimated 50 million consumers to conduct $12 trillion of business.
The Reserve has to date completed application assessments, developed internal test plans, and is currently renovating software. All Federal Reserve computer program changes are scheduled to be completed by year-end 1998 with the financial services systems that interface externally with the industry completed by mid-1998. This schedule leaves roughly 18 months for customer testing, to which "considerable support resources" will be dedicated.
The Reserve also has other Year 2000 responsibilities in its role as a bank supervisor, principally monitoring the progress of other financial institutions across the US. "By mid-year 1998 we expect to complete a thorough compliance preparedness examination of every bank, U.S. branch and agency of a foreign bank, and service provider that we supervise," said Kelley.
He added that the Reserve is prepared to get tough with any institution which does not appear to making good progress. It has already issued one ?cease and desist? order against a so-far unnamed bank holding company for failing to provide its subsidiary banks with reliable information systems services and for not addressing the needs resulting from the approach of the Millennium.
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