Year 2000 Readiness of Banks and Bank Supervisors
At the end of last year, the Basle Committee on Banking Supervision, acting through its Year 2000 Task Force, conducted its second supervisory survey on Year 2000 readiness, following up an earlier survey in late 1997. These surveys were designed both to promote heightened awareness and to provide a benchmark of the state of readiness of bank supervisors and commercial banks.
This second survey has identified significant progress in the financial community's efforts to help prevent the century date change from causing serious problems for businesses and consumers around the world. However, there still remain several (mostly smaller) jurisdictions that are manifestly under-prepared for the Year 2000 and intensive efforts will be needed in the little time remaining to avoid the likelihood of disruption in those markets.
Unlike the first survey, which was focused primarily on the larger financial markets, this survey also covered many countries less heavily reliant on technology. Of the 100 banking supervisors that responded to the questionnaire, all indicated that they had contacted their banks regarding the Year 2000 issue and the large majority said they had initiated supervisory programmes to ensure that banks allocate the necessary resources to identifying and resolving potential problems.
Supervisory Initiatives
Over 80 countries - including almost all the major ones - have issued guidance to banks on how to address the Year 2000 challenge. Most of this guidance establishes targets for completing preparations and testing. Throughout 1999, most supervisors will continue to monitor preparations against these targets. In order to provide effective oversight of internationally active banks, most supervisors have contacted their foreign counterparts where issues on Year 2000 preparations have been identified in relation to institutions jointly supervised.
Supervisors are well aware that problems of one kind or another will result from the Year 2000 changeover. Some supervisors, including most of those in the major financial markets, are already developing strategies for dealing with institutions unprepared for the event. However, more than half of the supervisors responding to the survey have not yet focused on developing such contingency plans, which suggests that more attention is needed on this aspect of the issue. Several papers on contingency planning were released in February by the Joint Year 2000 Council in order to provide guidance for supervisors in this regard.
The clear message that emerges from the survey is the need for supervisory authorities to continue to devote adequate resources to the task of ensuring that they and their financial communities are prepared for the Year 2000. To this end, the Basle Committee's Year 2000 Task Force is proposing to organise and lead a series of intensive workshops for regional groups of supervisors in the emerging markets in the course of April and May. These workshops will be devoted to issues such as examination and assessment, testing, contingency planning and compliance with supervisory guidance. The workshops will be tailored to the particular needs of the region as identified in the survey results.
Bank Preparations
Over 75% of the responding country supervisors reported that senior bank managers in most banks in their country understand the problem and are taking steps to address the problem appropriately. Almost all globally active banks are located in countries where the supervisor responded positively in this regard. While about one-third of banks do not yet follow earlier Basle Committee guidance on when particular phases of Year 2000 programmes should be completed, most of these are in markets that are typically less reliant on technology. About 10% of supervisors indicated that many banks in their country appear to lack sufficient time and resources to complete testing before the date change. Nonetheless, in a number of these instances significant progress has been noted since the survey was completed.
Based on experience gained from the introduction of the euro at the beginning of the year, testing is a significant challenge for the industry and invaluable for avoiding serious disruptions. In particular, rigorous internal testing of systems can identify and allow correction of most Year 2000 problems. The Basle Committee and the Joint Year 2000 Council recommend that greater emphasis be placed on making sure that such testing is addressed effectively by all organisations. Financial market authorities should encourage markets to focus scarce resources on the most effective Year 2000 testing schemes. Cooperative efforts that include the sharing of test results to permit proxy testing could be encouraged as a way to conserve scarce time and resources.
The Basle Committee will assist the Joint Year 2000 Council in the monitoring of Year 2000 developments in financial markets worldwide. Particular attention will be paid to the perceptions of banks and other financial institutions with respect to likely sources of cross- border Year 2000 disturbances and their potential impact on the behaviour of key participants in the international financial markets. Information collected by third parties, such as consultancy companies and credit rating agencies, will also be reviewed.
Holidays and System Changes
The survey confirmed that holidays are not consistent around the century date change. Some countries have either 31 December 1999 or 3 January 2000 - or in some cases both - as holidays. In others it will be business as usual on both dates. In a few countries a debate on this issue is still continuing. The sense of the financial community is that certainty as to the financial holiday situation is urgently needed because uncertainty causes problems for testing and Year 2000 planning, and the Basle Committee draws attention to the recent recommendation to this effect issued by the Joint Year 2000 Council (Advisory No. 1 - Holiday Schedules for late 1999/early 2000 should be decided as soon as possible).
One of the principal reasons for recommending that holiday decisions be taken rapidly is the operational and testing issues that arise when systems need to be changed. As in the matter of holidays, governmental and other authorities and business managers should avoid system changes except where they are essential. In general, system change controls should become increasingly stringent throughout 1999 with no changes except system fixes permitted during the very last part of the year and the earliest part of 2000.
Cross-border Cooperation
Supervisors themselves face a challenge in terms of ensuring that cross-border communications will function effectively if called upon. It is important that supervisors know who to turn to if problems arise in respect of international banking or financial groups. The Basle Committee and the Joint Year 2000 Council will continue their efforts to strengthen personal contacts between the officials responsible to ensure that contact lists are fully current and that robust communication mechanisms are put in place.
The Challenge Remaining
The Basle Committee has continuously urged bank supervisors to take the necessary and appropriate steps to see that the institutions they supervise are making satisfactory progress on Year 2000 readiness. Bank supervisors' actions may include on- and off-site examinations that assess banks' progress in meeting Year 2000 project milestones. Appropriate supervisory responses need to be promptly initiated to address any concerns or obstacles to achieving Year 2000 readiness. Supervisors are also coordinating and collaborating on the oversight of internationally active banks' preparations, focusing on interdependencies and contingency planning.
Nonetheless, it is the banks themselves that must do the work, and much work remains to be done. While markets were relatively troublefree during the euro conversion, there were some difficulties. Some financial institutions struggled with account reconciliations, and such disruptions could be even more challenging with the Year 2000. Cooperative efforts to address common concerns and the sharing of information will permit the remaining time and resources to be used most effectively to avoid serious disruptions. In particular, self- disclosure within the financial community is encouraged so as to permit organisations to leverage off the work of others. Financial institutions need to recognise that not only must they address the Year 2000 challenge effectively, but their counterparties, service providers and customers must also meet the Year 2000 challenge if business disruptions are to be avoided.
The Basle Committee and the Joint Council will continue to support regional events as a means of sharing information among supervisors on effective ways to address the Year 2000 and building cross-border relationships. Such cooperative regional efforts can go a long way towards reducing the impact of potential disruptions in geographical areas.
The questions on which the survey was based, a list of the countries that responded and a synopsis of the answers received are available on the BIS website as an attachment to this press release (www.bis.org/press/p990331.htm).
Notes for Editors
- The Basle Committee on Banking Supervision
The Basle Committee on Banking Supervision is a committee of banking supervisory authorities which was established by the central bank Governors of the Group of Ten countries in 1975. It consists of senior representatives of bank supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States. Its current chairman is Mr William J McDonough, President of the Federal Reserve Bank of New York. The Committee usually meets at the Bank for International Settlements (BIS) in Basle, where its permanent Secretariat is located.
- Year 2000 Task Force of the Basle Committee on Banking Supervision
The Basle Committee established the Year 2000 Task Force in mid-1997. It consists of specialists from G10 countries and is chaired by Charles A Freeland, Deputy Secretary General of the Basle Committee. Since its creation, it has prepared the following papers: The Year 2000: A Challenge for Financial Institutions and Bank Supervisors; Supervisory Cooperation on Year 2000 Cross-Border Issues; Supervisory Guidance on the Independent Assessment of Financial Institutions' Year 2000 Preparations; and Year 2000: The Supervisory Contingency Planning Process.
- Joint Year 2000 Council
The Council is jointly sponsored by the Basle Committee on Banking Supervision, the Committee on Payment and Settlement Systems, the International Association of Insurance Supervisors and the International Organization of Securities Commissions and consists of a cross-section of members of those four constituencies from all regions of the world. The Council is chaired by Mr Roger W Ferguson Jr, a Governor of the Federal Reserve System, and its Secretariat is provided by the Bank for International Settlements. Since its establishment in April 1998, the Joint Year 2000 Council has undertaken a number of initiatives aimed at raising awareness of the Year 2000 problem and prompting appropriate action within the financial sector's global regulatory community. The Council's activities have included the development of guidance on a number of policy issues such as testing and information sharing, the establishment of a global database of key Year 2000 contacts, the organisation of regional meetings and the distribution of a regular newsletter to financial market authorities worldwide. The documents issued by the council can be accessed on its website at www.bis.org.