Federal regulators ensure banks' readiness for Y2K

Susan Mcdonald

You don't often hear bank executives singing the praises of federal regulators, but local bankers give the examiners high marks for ensuring that the industry's computer systems will be Y2K compliant.

"The federal regulators are really holding banks' feet to the fire to ensure that there aren't going to be any issues," said John Taylor, executive vice president and regional chairman for Firstar, formerly Star Bank. "There are a lot of checks and balances that are independent of just the banks saying that we're going to be prepared."

Ballard W. Cassady Jr., executive vice president of the Kentucky Bankers Association, has been working closely with state banks and federal authorities on both compliance and public-education issues.

"There's a good reason all the experts always look to the banking industry as No. 1 in Y2K preparedness," Cassady said. "They're under very stringent guidelines from the federal government and the FDIC to be ready."

Federal officials are "becoming less concerned" about the industry's Y2K preparedness, said Jeff Dale, assistant vice president for century date change at the Federal Reserve's 8th District office in St. Louis.

"There's nothing that I have tremendous heartburn over, but at the same time I wouldn't paint a real rosy picture," Dale said. "I'm sure we'll have some glitches. If we didn't, I'd be very surprised. But our job is to be sure that they're minor, not major."

Federal officials have followed the progress of individual banks closely, first ensuring that they had plans, teams and resources in place. A second phase, which is just winding down, examined whether banks had been successful in correcting their systems and ensured that they had tested not only their own systems, but also interfaces with important third parties. The focus now will shift to contingency planning, Dale said.

And if a bank is not in compliance?

"We will use the existing supervision capabilities that we have, up to and including cease-and-desist-type orders if we had to," Dale said. "Obviously, that's the last event that we would want to get into, but we could use that avenue if we saw a bank that was not addressing the issue, was not completing testing successfully, did not have contingency plans, and it really looked like they were in a great deal of difficulty."

Along with many local bankers, Dale is less concerned about banks' ability to correct their computer problems than about the public's confidence in that ability.

"We're very concerned that particularly those folks who don't have a lot of confidence in technology to start with will hear all these negative messages and run to the bank and take their money out," Dale said.

"I think they'll discover that their money is much less safe sitting in their homes than it was in the bank, because it could be a robber's field day. We're trying to get that message out so that won't be a problem," he added.

Nevertheless, the Federal Reserve is prepared to provide extra cash if banks feel it is necessary, he said.

While no specific plan is set to flood local banks with currency, the Federal Reserve has significantly increased its currency order to ensure that an adequate supply of cash will be available, he said.

"We believe that while banks are planning to have some additional currency, much like they would for any holiday weekend, unless there's a media frenzy toward the end of the year, there should not be a problem where they need lots of additional cash," Dale said.

Cassady echoed Dale's concern about the dangers of withdrawing large amounts of money, emphasizing that while the Federal Reserve will have extra currency in its own vaults, he does not anticipate a significant increase in the cash held by local banks.

"I'm not worried about the banks," Cassady said. "I'm worried about the crooks. This is going to be a heyday for criminals, and that's why we're doing so much to educate the public."

-- Norm (nwo@hotmail.com), March 29, 1999

Answers

Fox news March 28 1999 <:)=

WASHINGTON - The Federal Reserve is worried about its ability to provide emergency loans to banks whose computers might seize up because of the year 2000 bug, a senior Fed official said Thursday. Speaking to the Senate Banking Committee, Fed Governor Edward Gramlich warned that banks' requests for money through the central bank's discount window could potentially rise "substantially in the future." "For example," he said, "one or more banks could experience operational problems, perhaps owing to computer failures related to the century date change, that require a large volume of temporary funding from the discount window." The millennium bug, or so-called Y2K problem arises when older computers are unable to recognize more than the two final digits of a year. Fed officials have repeatedly emphasized that U.S. banks appear to be in good shape for the millennium change and have gone through the necessary rigors of replacing old equipment and testing their systems. Still, while Gramlich said Thursday he was not predicting a bank computer problem, he said it was still important to be prepared for the possibility that it might happen. To that end, he asked the lawmakers to support legislation that would permit the central bank to make the necessary loans without running into technical constraints on its balance sheet. The Fed governor said the balance-sheet constraints have become a concern in light of a trend of a decline in the amount of reserves that banks hold with the central bank. When customers make deposits into their checking accounts, banks loan out a portion of the money in order to earn interest. They are also required to stash a portion of that money with the Fed for safe-keeping but such reserves are unprofitable for banks since they do not earn interest. So the banks have found ways to minimize reserves by using computer technology to shift funds among various types of accounts. Gramlich said that is a problem for the Fed, which by law must maintain a certain amount of assets on hand as collateral to back up its currency " the U.S. dollar. The Fed has ample collateral now but it could be forced into some difficult choices if a situation arose where computer failures sent banks scurrying to the Fed for emergency cash. "If the aggregate need for such loans exceed excess currency collateral, the Federal Reserve Board would be faced with some unpalatable choices," Gramlich said. He said the trouble caused by that loan demand could even pose complications for the Fed's ability to steer the nation's monetary policy, since adjustments in reserves are a key tool the Fed uses to set interest rates. "The small margin of available collateral poses a serious problem for the Federal Reserve," Gramlich said. "To date, the Federal Reserve has always had more than enough collateral to back Federal Reserve notes. In recent years, however, the margin of excess currency collateral has been dwindling." To fix the problem, Gramlich said lawmakers could loosen up restrictions on the types of securities that count as collateral on the Fed's balance sheet. For example, it could lift provisions that prohibit the Fed from counting mortgage securities as collateral. He also said passing legislation to allow the Fed to pay interest to banks on reserves would help because it would give them an incentive to hold more money with the Fed.

-- Sysman (y2kboard@yahoo.com), March 29, 1999.

Thanks, Norm. I have been lurking here for a couple of months. I was very concerned, and began to prepare in a small way. Your posts (not all, but some) have made a non-believer out of me. I think you are right that y2k effects will be minimal. I have about one week's worth of food for my family of four. That should be enough. Thanks again!

-- John (John@relieved.com), March 29, 1999.

Beats me what happened to the paragraphs. Click the link for easier reading. <:)=

-- Sysman (y2kboard@yahoo.com), March 29, 1999.

Get a load of Johnny-come-lately!!

-- Get (aload@that.huh!), March 29, 1999.

Thanks, Sysman. I have been lurking here for a couple of months. I wasn't very concerned, and hadn't began to prepare at all. Your posts (not all, but some) have made a believer out of me. I think you are right that y2k effects will be more then minimal. I have about one week's worth of food for my family of four. That will be no where near enough. I am planning several more trips to Sam's in the very near future. Thanks again!

-- Bob (bob@gate.net_), March 29, 1999.

This is just more of Norm's usual pollyanna drivel. What does being "y2k ready" mean? Davy Crockett and Col. Travis were ready for the Mexican army at the Alamo and they still got killed. "Ready" has no real meaning. Are these banks going to be fully y2k compliant? If so, how will they handle data from non-compliant banks, such as nearly all the banks outside the U.S.? If they cannot accept such data, the banking system goes down and all that nice electronic wealth will simply evaporate.

-- cody varian (cody@y2ksurvive.com), March 29, 1999.