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Summary and Comments

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Category: 

Banking

Date: 

1997-12-27 21:54:51

Subject: 

FED Official Warns of World Economic Disaster

  Link:

http://www.bog.frb.fed.us/boarddocs/speeches/19971215.htm

Comment: 

This statement by Edward Kelley, Jr. -- the Federal Reserve Board's fall guy on y2k -- to the Professional Banker's Association is a classic. He said, basically, that y2k threatens the world economy, and that the world is nowhere near compliant.

And they call me a doomsayer!

Notice that his December 15 remarks were aimed at increasing awareness. According to the California White Paper, awareness is the first 1% of a y2k repair program. Only 99% to go!

* * * * * * * *

I am pleased to appear before the Professional Banker's Association to discuss the Millennium Bug from a public sector perspective. 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. . . .

The global nature of today's financial services industry relies upon the interconnection of computer systems world-wide. My purpose today is to identify the serious nature of the problem and the urgent need for immediate action by the government of every nation. . . .

As this audience knows, banking systems and financial services rely heavily on computer systems to manage and deliver services electronically. 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. The scope of the Millennium Bug extends far beyond financial services and beyond the traditional notion of large mainframe processing systems. Computer systems that control telecommunications, electric utilities, transportation services, and a host of other critical infrastructure systems are vulnerable. The Gartner Group estimates 50 million embedded-system devices worldwide will exhibit Year 2000 problems. Embedded chips are used to control elevators, environmental systems, navigational devices, household appliances, safes and vaults, and on and on. The pervasive reliance on computer systems is not constrained to large industrialized countries; developing countries are also vulnerable, particularly those with older computer systems and software.

I think that some "what if's" cited by the Computer Information Center in the UK brings a practical perspective of the effect of what could happen in our everyday life as the millennium arrives.

•The computers in financial services organizations, etc. cannot deliver payments to counter parties, or receive funds from them. Gridlock ensues. There's a collapse in financial markets because of the bad news coming from companies about their inability to trade normally.

•The power fails, and it is mid-winter in the Northern hemisphere and mid-summer in the Southern hemisphere. The power company's production is controlled by innumerable computer chips, which were installed many years ago and no one knows what they do, how they work, nor dare they touch them, because the whole of the plant might come irreparably to a standstill.

More personal possibilities:

•The telephone system fails -- and you're unable to notify anyone of your pyramiding problems.

•Your medical center's computer has problems and cannot trace the medicines your elderly mother has been prescribed in the past nor the conditions she has had. A doctor prescribes the wrong medicine and she becomes very ill.

•You try to draw money from an ATM and it refuses, even though you know you have money in your account. Your bank's computer thinks it is January 1, 1900 -- and you weren't a customer then!

As I said, fixing the Year 2000 bug is not technically difficult but it is an enormous task that will be frightfully costly. After all, one needs only to find and repair all date instances in programs. But when you consider the number of lines of code in computer programs in the aggregate, however, the scale of this task is monumental. Consider these estimates:

•The Gartner Group believes that there are about 180 billion lines of COBOL code alone in the U.S.

•British Telecommunications estimates it will need 1,000 staff at peak to check and correct some 300 million lines of computer code. The Federal Reserve is faced with checking some 90 million lines, and some very large financial institutions have many more than that. . . .

The Federal Reserve operates several payments applications that process and settle payments and securities transactions between depository institutions in the United States. Three of these applications, Fedwire funds transfer, Fedwire securities transfer, and Automated Clearing House (ACH) are the most critical payment systems. About 10,000 depository institutions use the Fedwire funds transfer system to transfer each year approximately 86 million payments valued at over $280 trillion. About 8,000 depository institutions use the Fedwire securities transfer service to transfer each year approximately 13 million securities valued at over $160 trillion. The average total daily values of Fedwire funds and securities transfers are about $1.1 trillion and $650 billion respectively. The ACH is an electronic payment service that is used by approximately 14,000 financial institutions, 400,000 companies, and an estimated 50 million consumers. Approximately 4 billion ACH transactions were processed in 1996 with a total value of approximately $12 trillion. About 3.3 billion of these payments were commercial transactions and the remainder were originated by the Federal government. . . .

Challenges ahead include managing a highly complex project involving multiple interfaces with others, ensuring the readiness of vendor components, ensuring the readiness of applications, thorough testing, extensive communications, and establishing contingency plans. We are also faced with labor market pressures that call for creative measures to retain staff who are critical to the success of our activities. And the entire project is being closely coordinated among the twelve Reserve Banks, the Board of Governors, numerous vendors and service providers, approximately 13,000 customers, and numerous other government agencies. . . .

Reportedly, many foreign banks continue to be less focused on the Year 2000 than prudence might suggest. Many organizations appear to be underestimating how important and difficult effective preparation is to a successful Year 2000 effort. To broaden the base of global supervisory awareness of the issue, the Basle Supervisors are working with securities and insurance authorities to sponsor additional activities, and I understand that final arrangements are now being made to hold a large meeting for financial supervisors from around the world in early April to further focus on this topic. . . .

As the FED case demonstrates, your awareness program should emphasize that this is not just a technical matter, but rather a comprehensive business continuity problem that requires the joint cooperation of government and industry sectors. Your organizations have access to the highest levels of government within your constituent countries that can enable you to effectively elevate concern about the danger this problem poses to the safety and soundness of each country's financial system.

The PBA could also work closely with the financial community within developing countries to assist in identifying Year 2000 risks, prioritizing resources, and assessing the application and system inventories of your constituents. You can identify common third-party applications and systems and assist in coordinating efforts among these product suppliers and developing countries. The PBA can promote collaborative efforts among developing nations, and sponsor conferences and workshops on Year 2000. You can act as a clearinghouse for information and share "best practices" that could provide a valuable jump-start to those countries still behind the curve. Finally, Year 2000 assessment must also evaluate the level of financial resources available to developing countries to successfully complete a readiness program, and funding to constituents for Year 2000 initiatives should receive a high priority. . . .

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. 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. Let me close by urgently requesting your concern and assistance.

Link: 

http://www.bog.frb.fed.us/boarddocs/speeches/19971215.htm

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