Statement by Edward W. Kelley, Jr., Member, Board of Governors of the Federal Reserve System, before the Committee on Banking and Financial Services, U.S. House of Representatives, April 13, 1999

Federal Reserve Bulletin, June, 1999

I appreciate the opportunity to appear before this committee to update you on Year 2000 issues. I will describe the Federal Reserve's continuing efforts with respect to our contingency and event management plans as a central bank to ensure that adequate sources of currency and liquidity are available, and summarize the special attention being given to maintaining public confidence in the banking system. I will also focus on the progress of the banking industry in preparing for the new millennium and our supervisory initiatives, where considerable progress has been made since I last testified in September. Next, I will provide an overview of our efforts to support the President's Year 2000 Conversion Council and the international financial regulators' Joint Year 2000 Council, and close with our perspective on legislative proposals relating to Year 2000. I will also discuss the Board's strong support for passage of H.R. 1094, which would amend the Federal Reserve Act to broaden the range of discount window loans that may be used as collateral for Federal Reserve notes.

That is a lot of material to cover, and it reflects our extensive interest in and efforts to address the litany of Year 2000 issues. We are approaching the last months before the century date change (CDC) with a keener understanding of the magnitude of the task the banking industry, our country, and the rest of the world have been confronting. We are continuing our efforts to ensure that our financial system is safe and sound and ready for the century rollover. I am increasingly optimistic that the operational transition will go well and have come to believe that Year 2000 technical issues will not cause major problems in the financial markets of the United States. One issue I am concerned about and have raised with the press is how to ensure that the public has reliable, complete information about the readiness of the financial services industry and the other industrial and infrastructure sectors of the country. Actions taken by the public based upon fear or bad information rather than upon fact-based rationality may pose a greater threat to our economy than those caused by Year 2000 computer problems themselves. The public's perception of the Year 2000 challenge and response to that perception relative to our banking system is of critical importance to us all. The banking agencies are increasingly turning their attention to public education, and, in that regard, I welcome the opportunity this hearing affords to explain the Federal Reserve's perspective on the century date change.

CONTINGENCY PLANNING AND EVENT MANAGEMENT

Having worked extensively to correct the Year 2000 computer problems in our systems, we are confident that we will be fully prepared for the new millennium. Nevertheless, as the nation's central bank, the Federal Reserve is actively engaged in contingency and event management planning for any operational disruptions or systemic risks. The Federal Reserve's CDC Council, a group of our most senior officials, is coordinating contingency and event management planning across the Federal Reserve System to ensure a cohesive approach to our preparations. In addition, we are completing plans for our supervision function that provide for monitoring and responding to developments during the transition to the Year 2000, including any disruptions that may occur at financial institutions or in key financial markets for which we have responsibilities. These plans are being cc>ordinated with other federal, state, and foreign regulators and with the Year 2000 Response Center of the President's Council on Year 2000 Conversion.

Business Resumption

The Federal Reserve's plans for ensuring operational continuity build upon existing business resumption contingency plans. As part of our standard business processes, the Federal Reserve has long maintained and tested comprehensive business resumption plans, which have proved successful in providing for our continued operations during past crisis situations and natural disasters. Last fall, each of the Federal Reserve's business functions completed assessments of the adequacy of existing contingency plans for addressing Year 2000 risks. These plans are being enhanced to address issues unique to the century date change.

For example, we are identifying problems external to the Federal Reserve that may arise when the date changes to 2000, such as those affecting telecommunications providers, utility companies, and key market participants. Based on available information, we do not expect widespread problems in these areas, but we nevertheless believe it prudent to develop action plans to mitigate or work around them should they occur. Between now and the century date change, we will test and continue to refine these plans as necessary to optimize operational effectiveness at the century rollover. The goal of the contingency planning process is to minimize the chance for surprise disruptions and to minimize their impact should they occur.

Year 2000 Event Management Plan

Over the years, the Federal Reserve has demonstrated the ability to manage a wide range of crisis situations. Nevertheless, we are augmenting our existing communication and control structures to enhance our ability to collect information and react to issues as they develop during the next six months and, particularly, during the "rollover period," that is, the last few days or weeks of 1999 and the early days of 2000, as well as the leap year at the end of February. The objectives of our event management plan are to

* Monitor and report the status of internal systems, financial institutions and markets, infrastructure, and other pertinent areas

* Maintain a consistent flow of information within the Federal Reserve, to our business partners, and to the public at large

* Identify potential or actual problems and resolve them promptly.