The Subcommittee on Financial Services and Technology meets today to hear from the General Accounting Office (GAO) and the Federal Deposit Insurance Corporation (FDIC) on the year 2000 (Y2K) preparedness of the FDIC and the banks it regulates.
The Office of Management and Budget (OMB) has issued guidelines for Executive Branch agencies in which each agency is to complete a 5-phase process by certain dates. These include:
Experts have suggested that 40% of those firms that believe they have completed the renovation phase will find problems during the validation phase.
For most Americans, there is less concern about the technical aspects of assessment and remediation than the desire for assurances that their deposits will be accurately and timely credited, that they will continue to have access to their funds, and that they will continue to receive the same timely and reliable service they have come to expect of their financial services providers.
This Subcommittee sees the potential for bank failures where adequate preparations for the millennial date change are not conducted on a timely basis. It also sees the potential for limited economic growth and even recessionary influences if banks and other businesses are not adequately prepared for the millennial date change. Too many firms and individuals are looking for a magic formula to make these problems go away. If there is any harmony in the messages delivered to this Subcommittee, it is that there is no silver bullet. Each firm and each corporate entity will have to do its own assessment, remediation, and testing and the outside resources for this work are getting scarcer relative to demand.
Our hearing today is the second in a series of reviews I requested from the GAO regarding the Y2K preparedness of each of the bank regulatory agencies and the institutions they regulate. GAO will tell us that FDIC has well qualified staff to address this issue and that FDIC is generally headed in the right direction but it will warn us that FDIC is behind where it should be in OMB's 5-phase process. FDIC has a two part concern -- one part is internal to FDIC and involves its own systems. The other part is external to FDIC and involves the banks that it examines and supervises. Not only will GAO tell us that FDIC is behind the OMB recommended schedule, FDIC has not provided critical guidance to banks on contingency planning, assessing the risks caused by corporate customers (bank borrowers), and assessing the risks associated with third party automated system service providers. Moreover, GAO will report that FDIC's ability to report on the banks it examines and supervises is limited by inadequate data being provided by its examiners.
Internally, FDIC is also behind in assessing whether its systems are Y2K compliant. It has still not completed procedures that OMB required of executive branch agencies by mid-1997. FDIC has not yet fully assessed its mission critical systems nor developed contingency plans in the event remediation efforts fail to materialize as planned.
FDIC testimony will include an assessment of its efforts to date to bring its systems and those of its regulated institutions into Y2K compliance. It will report an extensive commitment of resources to both its external and internal system responsibilities. But it will also report that of its 500 computer application systems and subsystems, no more than 40 have been identified as mission critical and the assessment phase for these 40 systems is not yet complete. While I am heartened to hear of FDIC's accomplishments and initiatives, I am deeply troubled by its inability to meet or exceed OMB and GAO recommended guidelines.
Unless more leadership and commitment are brought to bear on this problem, I fear a
potential for financial chaos for many bank customers. I do not hesitate to tell FDIC and
other financial regulators in similar circumstances, here and now, that a few Cease and
Desist orders and memoranda of understanding, and the vague threat of reduced
CAMEL ratings sometime in the future are not going to remedy this problem, nor is this
approach going to satisfy the concerns of this Subcommittee. You need to do more
and you need to do it faster. I take this opportunity to remind all financial regulators
that more effort needs to be expended, and projected completion dates of the 5-phase
process must be shortened to prevent increasingly sharper criticism from this
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