Andrew C. Hove, Jr.
Federal Deposit Insurance Corporation
Committee on Banking, Housing, and Urban Affairs
Subcommittee on Financial Services and Technology
United State Senate
July 30, 1997
Good morning, Mr. Chairman and members of the Subcommittee. I appreciate this
opportunity to testify before you today on behalf of the Federal Deposit Insurance Corporation
regarding Year 2000 issues. Computers and computer systems, particularly systems used in
banking and finance, employ dates for a large number of functions. Therefore, the potential for
problems related to the inability of computer systems to recognize accurately dates beyond 1999
is a significant concern for the financial services industry and for financial institution regulators.
My detailed written testimony discusses Year 2000 issues as they relate to the banking
industry, our current supervisory concerns, and the initiatives underway to ensure that financial
institutions will be prepared to meet the needs of their customers in the year 2000 and beyond. It
also discusses the FDICís internal remediation efforts.
I submit that written testimony for the record and I will today briefly discuss how the
FDIC is working -- along with the other federal banking agencies -- to minimize the potential
harm of Year 2000 problems on financial institutions and their customers.
In March of this year, the FDIC directed its regional supervisory staff to review the Year
2000 plans of all FDIC-supervised institutions by year-end 1997. These reviews are being
conducted, in cooperation with the respective state banking authorities, at each scheduled
examination. For those institutions not scheduled for examination in 1997, this evaluation will
be performed by directly contacting the institution. These reviews will be used to identify those
financial institutions that need increased supervisory attention.
Since March, the FDIC and state banking authorities have conducted Year 2000 reviews
for approximately 2,081 FDIC-supervised financial institutions and 44 third-party computer
service providers and software vendors. These numbers represent roughly one-third of all FDIC-
supervised financial institutions and servicers. The results indicate that institutions are generally
aware of the Year 2000 problem. However, senior management and outside directors usually do
not possess in-depth technical knowledge and, as a result, may not have the same appreciation of
the risks posed by Year 2000 noncompliance that would be expected in larger, more
sophisticated data centers. Examiners have noted the potential for credit quality exposure from
corporate borrowers that have not taken steps to solve their own Year 2000 problems. In
addition, the reviews to date have identified instances where institutions have failed to recognize
potential problems with personal computers and environmental control systems.
Supervisory action will be taken, including enforcement action when warranted, if an
institution is not giving this issue the attention it deserves.
The large majority of FDIC-supervised institutions either use third-party servicers for
data processing or use purchased software packages on their in-house systems. These institutions
must rely on the servicers or vendors to take the necessary steps to make their software Year
2000 compliant. The FDICís reviews indicate that while most of these systems are not yet Year
2000 compliant, vendors and servicers are working to address the problem.
Because banks rely so heavily on third-party services, the FDIC is working closely with
the other federal banking agencies to separately assess the efforts of data processing servicers and
software providers in resolving Year 2000 problems. The agencies are currently performing
preliminary assessments at each of the 275 data processing servicers that serve financial
institutions including the 15 large multiregional data processing servicers that have been
identified by the agencies as posing a systemic risk to the financial industry should one or more
fail. With respect to software providers, the agencies are performing a similar assessment of the
12 major software products used by a wide segment of financial institutions. We estimate that
these twelve packages are used by 75 percent of the FDIC-supervised financial institutions that
purchase software applications for their data processing.
This assessment will also include each FDIC-supervised financial institution with total
assets greater than $1 billion, and financial institutions where in-house programming is
performed or where the financial institution provides data processing services to other financial
institutions. Most of these initial assessments should be finished by the end of the August, with
more in-depth reviews to be completed by the federal regulators by June of 1998. The agencies
plan to notify the serviced banks when their third party servicer has not taken sufficient action to
achieve Year 2000 compliance. We will expect the affected bank to give us clear commitments
and specific timetables for remedial action. The results of both the assessments and the reviews
will be shared among the banking agencies. In cases where satisfactory responses are not
forthcoming, the agencies will coordinate supervisory action, including enforcement action if
necessary, to ensure that Year 2000 issues are adequately addressed.
In closing, Mr. Chairman and members of the subcommittee, I want to stress that, while it
is too early for the FDIC to predict whether any institution may fail as a result of Year 2000
problems, we will be ready to intervene should an institutionís viability be threatened by its
inability to maintain accurate books and records. To be prepared for the possibility of failures,
we will analyze how the FDICís traditional resolution and receivership methods would be
affected by this type of problem.
Regardless of the difficulties financial institutions may encounter, each depositor will
remain fully insured up to the $100,000 limit. Maintaining consumer confidence in the U.S.
banking system will be the primary goal in our planning process.