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Summary and Comments

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Category: 

Banking

Date: 

1998-05-01 21:56:14

Subject: 

Official Contingency Plan: Buy Compliant Software . . . Later

  Link:

http://www.ncua.gov/ref/letters/98-cu-02.html

Comment: 

Now here's a plan! If a credit union -- or bank, or savings & loan -- finds in the waning days of 1998, or early 1999, that its in-house staff cannot fix y2k, the managers should consider buying compliant off-the-shelf software.

Now, why didn't I think of that? Or the chairman of Citicorp, which is budgeting $600 million to fix the problem? Could it have something to do with the fact that there is no compliant off-the-shelf software to which all the existing data can be ported in the time remaining today, let alone in late 1998?

At the end of this document, I have added the analysis of Mr. Ken Seger, who has, I believe, correctly identified the original source of this strategy. But you must read the full document before reading Mr. Seger's analysis, to appreciate fully Mr. Seger's insight.

Then there is the issue of liquidity. You know: cash. Frightened people may want to withdraw funds from their credit union. This is sometimes called a bank run. Of course, this document does not refer to a bank run. It refers instead to an "unplanned share outflow." Credit unions should prepare for this appropriately. For example, do not let Uncle Billy take the day's deposit to Potter's bank. Besides, Potter may be having liquidity problems of his own. "Since primary sources of liquidity could experience similar liquidity problems, credit unions need to arrange for several different sources of funding."

For over three decades, I've wondered what the contingency plan is for a worldwide bank run. Now I'll get to find out.

* * * * * * * *

LETTER TO FEDERALLY INSURED CREDIT UNIONS

NATIONAL CREDIT UNION ADMINISTRATION

1775 Duke Street, Alexandria, VA 22314

DATE: January 15, 1998

LETTER NO.: 98-CU-2

TO: FEDERALLY INSURED CREDIT UNIONS

SUBJECT: Year 2000 Contingency Planning

Execution of major projects seldom proceeds exactly as planned. Credit unions may need to deviate from their original Year 2000 plans, to some degree, and employ alternate means to achieve Year 2000 compliance. With a fixed, immovable date for achieving compliance, credit unions must not wait until problems arise to explore alternate solutions.

Contingency planning is a critical part of resolving the Year 2000 issue. Contingency plans should set forth alternate strategies to address all aspects of the Year 2000 project. Written contingency plans need to contain options and fully researched specific action steps that management will implement in the event that any components of the credit union's Year 2000 plan fail.

During the assessment phase, credit unions should have identified more than one option available as a solution to its Year 2000 data processing needs. One of these options, while probably not the first choice, may be a good candidate for a credit union's contingency plan, i.e., "Plan B." Simply put, the Year 2000 project team, senior management, and board should agree upon a date by which another course of action will be taken if it is not likely that the original plan is attainable. After identifying a good alternative solution, the credit union's contingency plan should be documented in enough detail to include, at a minimum, the: (1) planned date of execution, (2) estimated time to implement, and (3) estimated cost to implement.

As with the original plan, the credit union should strive to implement the new, compliant system (identified in your contingency plan) in sufficient time to adequately test the system. For example, credit unions that rely on an in-house developed system may plan to renovate their systems in order to ensure Year 2000 compliance. During its fix, a credit union may run into difficulties that may negatively impact its ability to renovate the system. In this case, there should be a predetermined date by which the credit union should decide if it can indeed make the fix. As the date approaches, the project team may have fallen behind schedule and determined that they are unable to meet critical milestones and deliverables. Therefore, it may be necessary for the team to forego the renovation option and go to Plan B. Instead of renovation, the team may have previously decided that the contingency plan is to purchase a commercial off-the-shelf (COTS) application. As part of the contingency planning process, the credit union should have already identified, reviewed, and analyzed several COTS applications, and ranked those systems in order of preference, based upon credit union operations and needs.

Similarly, the credit union may be relying on a vendor's fix. If the vendor does not provide a satisfactory response as to its date of compliance or facilitate the testing of the fix by a predetermined time frame, the credit union may also have to revert to Plan B. The contingency plan may also be to purchase a COTS package.

Knowing when to revert to Plan B will be key as the timing could affect whether the credit union is in compliance in sufficient time to ensure adequate Year 2000 processing. . . .

Liquidity. As the Year 2000 approaches, members may become concerned about the ability of their credit union to continue to provide services which could result in unplanned share outflow. Credit unions need to ensure themselves adequate liquidity in case of excessive share withdrawals. Since primary sources of liquidity could experience similar liquidity problems, credit unions need to arrange for several different sources of funding. . . .

NCUA expects credit unions to address contingency planning in their Year 2000 Plan. NCUA also expects those plans to be sufficiently detailed to ensure that the credit union achieves Year 2000 compliance. Finally, NCUA expects credit unions to implement their system contingency plans as outlined in their overall Contingency Plan. If you have any questions, please contact your examiner, NCUA regional office, or state supervisory authority, in the case of state chartered credit unions.

* * * * * *

Mr. Seger wrote:

This letter reads like an Abbott and Costello routine, a la "Who's on first?"

Abbott: Okay, if you don't have time to fix it, instead of fixing it, you use a different fix that will take less time to fix it.

Costello: But if the other fix takes less time than the first fix, why don't I just use the second shorter fix first?

Abbott: What are you, a wise guy? (whap) Now listen again closely, if you don't have time to..........

Link: 

http://www.ncua.gov/ref/letters/98-cu-02.html

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