Year 2000 Readiness Assessment Strategy for FDIC-Supervised Financial Institutions
The Federal Deposit Insurance Corporation (FDIC), with
assistance from the state banking authorities, completed its second round of on-site Year
2000 readiness assessments of FDIC-supervised financial institutions by March 31, 1999.
As in the first round of on-site assessments, the
efforts of each institution were assessed as "Satisfactory," "Needs
Improvement," or "Unsatisfactory." The Year 2000 readiness efforts of the
vast majority of FDIC-supervised institutions are progressing favorably. Of the 5,867
FDIC-supervised institutions, 5,709or 97.3 percentwere assessed as
"Satisfactory." Of the remainder, 144or 2.5 percent of the
institutionswere assessed as "Needs Improvement," and 14 institutions were
assessed as "Unsatisfactory."
The FDIC and other financial institution regulatory agencies continue to place a high
degree of emphasis on the Year 2000 readiness efforts of supervised institutions. Since
1996, the Federal Financial Institutions Examination Council (FFIEC) has issued 13 pieces
of guidance on various Year 2000 issues. Milestone dates have been established for each of
the critical phases of Year 2000 remediation, as well as other important aspects of Year
2000 readiness preparedness.
The final nine months of 1999 represent a critical phase in a financial institution's
Year 2000 readiness preparations. By June 30, 1999, financial institutions' testing of
mission-critical systems should be complete and implementation of mission-critical
systems should be substantially complete. By June 30, 1999, financial institutions should
also have substantially completed the development of their business resumption contingency
plans and designed a validation method so the plans can be tested for effectiveness and
Procedures for supervisory efforts for the remainder of 1999 were recently communicated
to our examination staff. The guidance takes into consideration the limited time available
to institutions to provide corrective action. Phase III of the Year 2000 readiness
assessment process will consist of a series of quarterly contacts with each
FDIC-supervised institution. A combination of on-site visits and telephone contacts will
be used depending on the institutions risk proFILe. During these contacts, emphasis
will be placed on the review of:
final testing results;
business resumption contingency planning efforts;
deficiencies noted during previous Y2K assessments;
customer communication and awareness programs;
liquidity planning; and
credit risk assessment and monitoring.
Examiners will also ensure that institutions continue to report regularly to their
boards of directors on the status of Year 2000 readiness efforts.
Financial institutions' Year 2000 readiness efforts will continue to be characterized
as "Satisfactory," "Needs Improvement," or "Unsatisfactory."
The following rating criteria were provided to our staff for clarification:
Satisfactory - A financial institution should generally be rated
"Satisfactory" if (1) it is expected to or meets the June 30, 1999, target date
for mission-critical testing; (2) it has completed assessing material customers' Year 2000
preparedness, and continues to monitor such preparedness; (3) it has developed an adequate
customer awareness strategy; (4) it has begun developing Year 2000 business resumption
contingency plans and is expected to meet or meets the June 30, 1999, target date; and (5)
the institution is expected to have a process developed to validate the contingency plan
by June 30, 1999.
Needs Improvement - A financial institution should generally be rated
"Needs Improvement" if (1) it is not expected to meet or does not meet the June
30, 1999, target date for mission-critical testing; (2) its assessment of material
customers' Year 2000 preparedness is incomplete or not ongoing; (3) its customer awareness
strategy is incomplete or is not responsive to customer concerns; (4) it has not developed
Year 2000 business resumption contingency plans by June 30, 1999; or (5) the institution
is not expected to meet or does not meet the June 30, 1999, target date for developing a
process to validate the business resumption contingency plan.
Unsatisfactory - A financial institution should generally be rated
"Unsatisfactory" if (1) its mission-critical testing misses the June 30, 1999,
deadline by more than 30 days; (2) its assessment of its material customers' Year 2000
preparedness is significantly flawed; (3) it has not begun developing Year 2000 business
resumption contingency plans; or (4) it misses the June 30, 1999, target date for
developing a Year 2000 business resumption contingency plan by more than 30 days.
Actions for Institutions Assessed Less than Satisfactory
The short time remaining until the century date change warrants aggressive and prompt
supervisory action to achieve desired remedial attention by institutions rated "Needs
Improvement" or "Unsatisfactory." The FDIC will generally seek a Safety and
Soundness Order pursuant to Section 39(e)(2) or a Cease and Desist Order under Section
8(b) of the FDI Act for institutions assessed as "Needs Improvement" or
A financial institution's failure to appropriately address Year 2000 readiness problems
may result in denials of applications FILed pursuant to the Federal Deposit Insurance Act
and in civil money penalties. In addition, a less than satisfactory assessment may result
in reductions in the rating of an insured institution's "Management" component
or in its composite rating. A less than satisfactory assessment could also result in a
decline in an institution's Supervisory Subgroup assignment, causing an increase in the
deposit insurance premiums to be paid by the institution.
Management is encouraged to actively utilize the services of its internal audit process
and external audit programs. A well-coordinated review and reporting process should
substantially lessen the risk that problems will go undetected.
For further information, please contact your Division of Supervision regional office.
James L. Sexton
Distribution: FDIC-Supervised Banks (Commercial and Savings)
NOTE: Paper copies of FDIC financial institutions letters may be obtained through the
FDIC's Public Information Center, 801 17th Street, NW, Room100, Washington, DC 20434