Fed Sees Smooth U.S. Financial Transition At Y2k

Updated 11:16 AM ET September 28, 1999

WASHINGTON (Reuters) - It is increasingly likely that U.S. financial institutions will roll smoothly into Year 2000 without major computer failures but banks should remain wary, Federal Reserve Governor Roger Ferguson said Tuesday.

"Although much work has been done within the United States and around the globe in anticipation of the century date change, we should not be complacent," he told a bankers' group called the Wallenberg Forum at Georgetown University.

The approach of Year 2000 has fanned worry that computers programmed years ago to recognize only the final two digits of a year might stop calculating or count incorrectly when 2000 occurred because they do not recognize "00" as a new year.

But Ferguson said intensive testing by banks and other financial institutions suggested "any disruptions or glitches that do occur will be minor and of limited duration."

Ferguson was approved last week by the Senate Banking Committee to become vice chairman of the U.S. central bank but the full Senate must still vote on it.

He made no comment about the economy or about monetary policy as the Oct. 5 session of the policy-setting Federal Open Market Committee approaches. The Fed raised short-term interest rates at its last two sessions and markets are nervous about the possibility of a third rise next week.

Ferguson said even though the most likely outcome of current preparations for the Year 2000 changeover was "a smooth transition, perhaps even business as usual," the Fed will be in close contact with financial markets and banks right through the date change.

The U.S. central bank will be ready to provide liquidity -- or extra money -- if it is needed through a "special liquidity facility" available to financial institutions from Oct. 1 through April 7, 2000.

It also has extra cash stored at numerous sites around the country so that banks can meet "sudden or unexpected spikes" in demands for currency if necessary.

Ferguson said the global financial community has done extensive testing this year, including tests by 19 countries in which 500 financial institutions successfully completed Year 2000 transactions on systems that were forward dated to simulate the rollover.

As a result, he said it was possible to feel confident that payments systems -- the means through which checks and other financial instruments are settled -- will work normally.

He noted there were signs of increased demands for liquidity and safety in the United States and that some lenders were reluctant to offer unsecured credit over year-end. The Fed's special liquidity facility should help keep an adequate supply of liquidity so that markets remain orderly and interest rates do not climb sharply, Ferguson suggested.

He said there was more uncertainty about Year 2000 impact outside the United States.

Financial firms in developed countries seemed to be making good progress in preparing for the date changeover but there was a considerable distance to go in countries that were less highly automated.

A mitigating factor was that countries least dependent on computers could more easily switch to manual work or use other contingency plans temporarily, Ferguson said.

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Ray

-- Ray (ray@totacc.com), September 28, 1999