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U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    The committee met, pursuant to call, at 10:03 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives Castle, Lucas, Metcalf, Cook, Biggert, Green, LaFalce, C. Maloney of New York, Bensten, J. Maloney of Connecticut, Hooley, Sandlin, Goode, Inslee, Schakowsky, Gonzalez, S. Jones of Ohio, Vento, Kanjorski, Sherman, Lee and Moore.

    Chairman LEACH. The hearing will come to order.

    The committee convenes today to assess the efforts the Nation's banks, thrifts, and credit unions are making to attempt to ensure smooth and seamless transition to the Year 2000. With eight months to go, the public and the media are paying increasing attention to the readiness of the Nation's financial services sector as well as other critical sectors of the economy.

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    As a Member of Congress, I have been approached by constituents asking if they should stock a year's supply of canned goods or prescription drugs. One asked if he should liquidate his 401(K) plan and purchase silver. Another wondered if more firearms were needed to protect his home. While these concerns may sound extreme, it is reflective of public uncertainty about Y2K. Clearly, one thing can be known with some certitude, that there will likely be some temporary inconvenience or difficulty associated with the Year 2000. What one cannot forecast with certitude is how significant problems will be, either for individuals or for the economy as a whole.

    No one can guarantee that there won't be billing record errors or other snafus, but the Government can guarantee that bank accounts at federally-insured institutions will be fully protected up to the statutory limit, making federally-insured financial institutions the safest place for an American to hold assets when the clock strikes midnight on December 31.

    Despite the prospect of a few imperfections in banking industry preparations, it is incumbent on this committee to ensure that the banking industry leads the country in Year 2000 readiness. Over the past two years, this committee has attempted to lay out a series of Year 2000 concerns and to encourage Federal agencies to provide Year 2000 seminars and model approaches for regulated institutions.

    Clearly, a lot of effort has gone into this process by each of the agencies and the institutions with which they interact. In this regard, I am pleased that benchmark goals and dates for Year 2000 remediation and testing have been established by the regulators. These performance standards are important, not only for financial institutions, but also as models for other key sectors of the economy, including electrical utilities, telecommunications companies and industries critical to public health and safety, such as hospitals and pharmaceutical companies.
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    As the committee meets today, the clock is ticking to the regulatory deadline of June 30 when financial institutions are expected to be fully remediated and tested. Over the past year, the committee has tracked the progress of financial institutions as they followed the regulatory time-line for inventorying and fixing mission critical systems, testing those systems, evaluating the Year 2000 credit risk to borrowers, and developing backup contingency plans.

    Each quarter the committee has been informed by Federal regulators that the vast majority of financial institutions under Federal supervision, in some cases as much as 96 to 97 percent, are rated satisfactory. Nevertheless, some troubling questions have been raised in recent months that deserve an answer, including the elusive definition of satisfactory itself.

    Why is it that private sector companies assessing Y2K progress at banks have not reflected as confident a scenario as the regulators? Why is it that the inspectors general at several agencies have raised questions about the thoroughness or accuracy of Y2K exams? Are indeed some institutions being awarded a satisfactory rating by the regulators without having met adequate standards of performance?

    The committee has asked the regulators to address these questions, and we expect to hear from some of our witnesses that just as some institutions are behind the curve, others may actually be ahead of the regulatory milestones.

    Yet even if banks are largely prepared and the Federal Government including key agencies like the Social Security Administration are fully ready, there may still be difficulty if providers of services, software, electricity, and bank customers themselves are not. The public may hold institutions accountable for problems precipitated by others, even if they are not culpable for failures in their own institutions. That possibility makes critical the development of contingency plans to ensure continuity of banking services under any scenario. Those plans could include, for example, financial institutions being open extra hours on New Year's Eve, Friday, December 31, and New Year's Day, Saturday, January 1, and they must, at a minimum, include plans to ensure that ATMs are adequately stocked with cash during a period when the public appears inclined for prudential reasons to feel it wants a ready reserve at home and in the wallet.
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    Ready access to ATMs would hold the potential to be the single most important confidence builder for the American public, unless machines are overloaded with demand. If an individual goes to the local convenience store to use an ATM and finds it out of cash, the banking system may be blamed even if the machine is owned by a third-party provider. If members of the public tried to use a non-functioning ATM, they may erroneously conclude that the bank, savings and loan, or credit union they belong to is not operating. Ironically in that instance, an institution may actually be internally Y2K compliant, but yet face a serious breach of public confidence if its capacity to provide money to the public through the ATM network is compromised. Hence the challenge to the industry for providing for withdrawals from checking accounts and ATMs is to ensure not only there is new liquidity at the bank, but also that the ATM machines are kept fully stocked with cash throughout potentially high demand periods.

    Financial institutions also need to be prepared for a confidence deficit. As Franklin Roosevelt said more than 50 years ago, ''The only thing we have to fear is fear itself.'' As in the case of fire, if there is a panic in the banking sector and everyone rushes to the door, someone is likely to get hurt. But if, on the other hand, there is an orderly approach to preventing a problem in the first place, and an orderly approach to contingency planning to handle temporary operational failures should they occur, then public concerns can be alleviated.

    Of course, industrywide assessments will not tell individual Americans precisely where their own financial institution stands. That is up to the institutions themselves. For that reason, we are honored to have with us today representatives of four financial institutions of various sizes and types. We have asked them to serve as case studies of the kinds of best practices the banks and credit unions are preparing to respond to their customer questions about the Year 2000.
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    In sum, the Year 2000 issue affects every major business and industry. The financial industry is at the heart of the American economy. While there may be mistakes or snafus, the guarantee of a deposit insurance protection serves as a bedrock for public confidence. It must be understood by all that the safest place to keep reserves for a family emergency is in a federally-insured institution.

    With that, I yield to my good friend and distinguished Ranking Member, Mr. LaFalce.

    Mr. LAFALCE. I thank you very much, Mr. Chairman. Today's hearings are especially appropriate since they occur very near the end of the first quarter of the year, immediately prior to the millennial change. We can now preview the regulators' reports for that period with enough time to consider more guarantees for a happy new year.

    My congratulations to you for seizing the moment and for the great pertinence of the questions you formulated in the invitations to our witnesses. Thanks are also due to the witnesses for very enlightening written presentations.

    My general recent views on the Y2K problem in the United States are improved from what they were. The positive tone from the financial regulators and from many third parties monitoring their claims to increasing readiness are not the sole reasons for this improved attitude. Since this January, concrete events in a number of users are showing some light.

    For instance, although enhancements are still needed in disbursements of unemployment checks in some States, compensations which depend on activating account files with dates well into 2000, no one is going without unemployment benefits, and an easy contingency plan for payments was executed in the few States that needed one. Another example, the very complex travel and hotel reservation system which also requires entries into the next year rolled dates into 2000 with relative ease. Additionally, my own State of New York, the first in the Nation to start a new Fiscal Year 2000, encountered no difficulties on its opening on April 1. Champagne literally flowed in Albany.
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    April 9 was what many computer technicians referred to as a magic date. It was the 99th day of the 99th century year when many predicted a string of 9's sequence in programs and embedded chips which would crash key software and hardware in a wide variety of endeavors. Indeed, the entire national power grid was brought to back-up readiness through the North American Electric Reliability Council. However, successful remediation, at least for that particular problem, had been completed. Moreover, the grids communications systems were successfully tested on that day to assure they would work into the next year. No one in the country lost power due to the anticipated date. Moreover, there were virtually no reports of system malfunctions anywhere. The range of fixed and working systems to cover at least that magic date went from airplanes to ATMs.

    Sizable increases in governmental and nongovernmental Y2K expenditures demonstrate the Nation is devoting the resources needed for a cure and is not going the way of the proverbial ostrich.

    In the realm of financial institutions, one of our witnesses today, the Grant Thorton Accounting Firm, issued a report showing many community banks were short on faith their own customers might be Y2K ready. However, that study also demonstrated the banks themselves had no qualms about their own abilities.

    The Gartner Group, perhaps the premier global measure of Y2K compliance, recently asserted American financial institutions were moving into what that firm designates as Phase V, the near-completion goal.

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    In short, as 1999 moves forward, evidence mounts that the pesticides for the millennium bug are doing their job. I realize, however, that anyone making that assertion risks a danger. Probably nothing could be more insidious about this serious technological threat to national prosperity than that it is boring to cure. Repetition after repetition of fixes and tasks, seemingly endless searches through dull electronic manuals and internet sites, and mind-numbing statistical status reports, are no one's idea of the good life.

    So, when I say matters are improving, I will also say now would be the very worst time to relax. Hence, the great appropriateness of today's hearing. We are not setting out to review the world or even the entire United States. Our focus is one significant slice of that, our own financial institutions.

    Despite my improved perspective, I do have some qualms. First, when the financial regulators issued their joint guidelines for institution compliance in May of 1997, I had a sense of unity and consistency. As these have been applied in the real world, I believe there has been drift toward differences in actual guideline applications. We watched particularly the details of the reports of the agency inspectors general and note that not only do such key terms as ''substantially in compliance'' differ from one regulator to another, but also differ as to how they are applied within a given agency.

    To some this might seem like a peccadillo. Yet in the computer world, standardized measurement constantly discussed and compared under the term benchmarking is the essence of successfully completing a project and getting it to live up to expectations. It is also the essence of bringing a project in on time. Unlike a software company which might be able to delay bringing a product to mark, time is what we emphatically do not have with Y2K.
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    So I will listen particularly today for symptoms of slippage in time and in quality, symptoms that might hide in the differences which have developed in how the words of the original guidelines translate into the true physical goal, working systems in 2000.

    A second qualm: A must-do situation such as Y2K attracts claims that also dictate legislative actions peripheral to the main goal of making the computers work. We will hear about some of those today.

    I am not anxious to see the focus of this main goal shift to settling disputes more suitably left to another time and their own devices. We have a very serious situation with Y2K all by itself, and cluttering it with bootstrapism only enlarges difficulties. These are going to arise considerably as the international situation chimes in. However, I remain willing to listen on these items, although I have some preliminary notions.

    The Federal Reserve asserts it needs legislative expansion in what collateral it can use to back the currency which it will stand ready to augment by at least $50 billion in the coming months if there is a public demand for it. I have little doubt their petition is sound, and that is why I have cosponsored with the Chairman H.R. 1094 to do just that.

    The National Credit Union Administration wishes to see the $600 million cap lifted on what it can borrow from the Federal financing bank. I have little doubt there is a genuine case for some flexibility to cover any emergency they might encounter from Y2K. I do not know if that also means they should also get access to their full authorized borrowing authority of nearly $18 billion, which Treasury has long supported capping at only the current appropriations imposed, a $600 million limit.
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    Some would like to see the President's statutory liquidity requirements of the Home Owners Loan Act lowered for thrifts. I have some sympathy with the old policy complaint, which has been around long before anyone in this room really thought about Y2K, that the liquidity requirement is not a matter of liquidity at all, since savings and loans cannot get to the liquid assets for real use. They have to be held in the limbo of specified level and specified places. Yet whether this is a Y2K issue might be quite a different matter.

    The hearing invitations also requested testimony from nearly all witnesses on H.R. 775, introduced by Mr. Davis of Virginia, and companion bills to limit liability from instances growing out of Y2K. Although our committee has no jurisdiction over this matter directly, as it resides in the Judiciary Committee, financial institutions might be prone to litigation targeting due to the date intensive nature of their business. Consequently, I would welcome hearing views on this subject.

    I hope that some of the witnesses will be able to comment also on the fact that suits brought on prospective Y2K grounds are not enjoying great success in the courts. I realize lawyers across the Nation are scouring the books to find causes of action. However, the staff can also deliver nearly up-to-the-minute status reports from the internet on those cases already brought, which show a limited success rate and largely easy and rational settlements.

    Finally, we also have a semi-international issue which is also legislative in nature. Mr. Dreier, the Chairman of the Committee on Rules, has introduced House Joint Resolution 14 to move the Federal observance of the New Year's holiday from Friday, December 31, to Monday, January 3, 2000. But Mr. Duisenberg, Chairman of the European Central Bank, is going in the opposite direction. He wishes to close the European banks on Friday, December 31, 1999. And I understand most of the witnesses oppose the Dreier approach, but I would appreciate some opinions on whether or not it is important to achieve some coordination with the European markets on when financial institutions are going to be closed on both continents at this sensitive period.
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    Mr. Chairman, my remarks have been very lengthy. I apologize for that. But I did want to make all these points, because I consider this an important hearing. I thank you for bearing with me.

    Chairman LEACH. Thank you, Mr. LaFalce.

    Does anyone else want to make an opening statement?

    Mr. Metcalf.

    Mr. METCALF. Thank you, Mr. Chairman. I would like to reiterate how important this hearing is today. The confidence in the payment system can be questioned if we in the Congress, the legislators and the financial marketplace are not able to convince the public that we are prepared to handle the Year 2000 computer situation.

    I am proud to have here today two people who will speak later representing Viking Bank in Seattle, Washington, Patrick Redmond, President and CEO, and Dana Casano, Vice President of Marketing, have done a tremendous job in communicating to their customers regarding what Viking Bank has done in Y2K preparation.

    Many articles have been written in newspapers, and they have been even highlighted by the FDIC as a model institution in being proactive on this issue for their customers. Pat and Dan, I welcome you today.

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    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Metcalf. Anyone else?

    Mr. VENTO. Mr. Chairman, just briefly, I want to suggest I think we are doing the right thing in terms of oversight on this issue, and this is a case where we have to really rely upon the regulators and others to do their job in terms of implementing this transition date. If they need new tools or additional authority to accomplish that, we, I assume, have heard about it already; but in any case, we know there are a couple of potential problems, and I hope that we can address those in terms of the liquidity with regards to credit unions.

    There is a question of liability, whether in fact there needs to be additional effort here to address it. But candidly, we just have to be certain, we must be certain, that the regulators are moving forward in such a way as to, in fact, make that transition work. I think a disproportionate responsibility resides with the financial institutions in the community because of the date-sensitive nature and, of course, the stability, the interpretation of that stability, and reaction by the public to the inability of banks to respond to this particular matter.

    So with that said, I just hope to participate on and off these few days and I commend the regulators and the witnesses. Thank you.

    Chairman LEACH. Thank you very much.

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    Mr. Cook.

    Mr. COOK. Thank you, Mr. Chairman. It is my pleasure to welcome to the committee Mr. Scott Anderson, President and Chief Executive Officer of Zions Bank. My constituent and my friend. I think he will be testifying on our second panel today.

    Having toured Zions Bank operation center in Salt Lake City with Scott just last week, let me assure my colleagues on the committee there is no more qualified individual to provide testimony and answer questions relating to the Year 2000 readiness. As a result of my meeting with Scott last week, I have agreed to join Utah bankers in assuring customers that their money is safe in the bank.

    I urge all my colleagues, particularly Members of this committee, to work with their own financial institutions in spreading information related to Year 2000 readiness. I think particularly because I personally think that one of the potential problems is a stirring up of the public without the right information and some of the Y2K problems might result in over-hysteria on the part of the public. I think all of us need to do things to assure our communities that that is not going to be the case.

    I thank the Chairman for the opportunity to introduce Scott Anderson to the committee.

    Chairman LEACH. Thank you very much, Mr. Cook.

    If there are no further opening statements, let me welcome our panel, which is composed of five principal Federal regulators and a representative of the State regulatory system on behalf of the State bank supervisors. Our first panelist will be Governor Edward W. Kelley, Jr., who will be testifying on behalf of the Board of Governors of the Federal Reserve System; then we will turn to Donna Tanoue, who is Chairman of the Federal Deposit Insurance Corporation; John D. Hawke, Comptroller of the Currency; Ellen Seidman, Director of the Office of Thrift Supervision; Norman D'Amours, who is a former colleague of ours and Chairman of the National Credit Union Administration; and, finally, John Burke, Commissioner of the Connecticut Department of Banking, who will be testifying on behalf of the Conference of State Bank Supervisors.
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    Let me begin in the order of introduction. Governor Kelley, please proceed.


    Mr. KELLEY. Thank you, and good morning, Mr. Chairman and Members.

    I would request that my full statement be placed in the record, sir.

    Chairman LEACH. Without objection, let me say that the full statements of all the panelists without objection will be placed in the record. We look forward to you presenting your testimony in any manner that you see fit.

    Mr. KELLEY. Thank you. I appreciate the opportunity to appear before this committee to update you on Year 2000 issues. Much has happened since I last appeared here in September. Indeed, the number of complex issues that we have had to address and in which the committee has expressed interest is so great that by necessity I will highlight only a few in my oral statement here this morning.

    In brief, we are engaged in intense efforts to ensure that our financial system is safe and ready for the century date change. I am increasingly optimistic about prospects for a transition relatively free of disruptions and have come to believe that the most likely outcome is that Y2K technical issues will cause no more than inconveniences in the financial sector of the United States.
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    At the outset, I would like to indicate to the committee that the Board strongly supports the passage of H.R. 1094, that would amend the Federal Reserve Act to broaden the range of discount window loans that may be used as collateral for Federal Reserve notes. Use of a wider range of discount window loans as collateral would give us more flexibility in managing monetary policy and would update the Act to reflect the types of borrowing arrangements and collateral commonly available today.

    With respect to currency, there have been many statements made by various commentators about the need for consumers to have some extra cash on hand during the rollover. We do not believe that the public needs to hold excess cash. Although there may be isolated problems, we expect that the usual payment methods, including credit cards and checks, will be functional. Funds normally held in depository institutions are most safely kept right there. Nevertheless, we recognize that there will likely be some increased demand for cash, and as I have said before, we remain solidly committed to meeting any additional demands of the public. Let me emphasize again that we have taken steps to increase our inventory of currency as a precautionary measure, not because we believe the public should hold more or that demand will be excessive.

    Turning to the readiness of the banking industry, let me emphasize once more that while bank supervisors have provided significant guidance to prepare for the Year 2000, we cannot be responsible for ensuring the readiness of any banking organization. The senior managements of banks are responsible for ensuring that their institutions are able to provide uninterrupted services and operate in a safe manner after the rollover.

    With that said, over the past nine months, the Federal Reserve conducted Phase II of our supervision program and determined that 95 percent of the banking organizations we supervise are making satisfactory progress in their programs, and the large majority are in substantial compliance with the FFIEC milestone dates. I must emphasize that these milestones are not intended to be hard and fast deadlines, but rather are important benchmarks for ensuring that a bank is managing its Y2K program appropriately and the schedule provides a six month cushion to tie up loose ends and operate renovated systems.
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    This process is very complex and to be realistic, it should not be surprising to see some testing activities extend somewhat past the milestones. While ratings provide an objective measure for assessing progress relative to a milestone and are being taken very seriously, they are not meant to imply certainty with regard to overall readiness or the lack thereof.

    Turning to international matters, let me point out that my colleague, Governor Roger Ferguson Chairs the Joint Year 2000 Council established in April of 1998. The Council has provided a vital forum for communication among international supervisory authorities, and serves as a point of contact with national and international private sector initiatives.

    The Council has developed a list of global supervisory contacts; published bulletins and guidance papers on key phases of the Year 2000 process, including testing, information sharing, and contingency planning; and conducted regional round tables for financial market regulators. Another round of regional meetings focusing this time on contingency planning will be held later this year.

    With the increased attention and resources now being directed to the Year 2000 issue internationally, we hope that momentum can be increased and resources focused effectively and cooperatively. If so, we can reasonably expect major financial foreign markets to be prepared for the century date change.

    As the Nation's central bank, the Federal Reserve is actively engaged in contingency planning for operational disruptions and systemic risks that may occur as a result of the century date change. We are coordinating contingency planning across our system with other Federal, State and foreign regulators and with the President's Council.
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    Over the years, the Federal Reserve has demonstrated the ability to manage a wide variety of crisis situations. Nevertheless, we are augmenting our existing structures to collect information and react to issues as they develop during the rest of 1999. The objectives of our event-management plan are to closely monitor the situation as it unfolds, maintain strong information flows among responsible parties, and to quickly identify and address any emerging problems.

    As we have said before, the Federal Reserve is prepared to lend with adequate collateral. Depository institutions should address potential liquidity issues and facilitate the borrowing process by completing documentation and positioning collateral now, rather than waiting for the actual event, when there may be other organizations seeking funding at the same time.

    As a final point, I would like to address one issue of concern. How to ensure that the public has reliable and complete information about the readiness of the financial services industry and the other sectors of the economy. Public confidence does not require that everyone believe that everything will always work perfectly. Rather, the public needs to be confident that the information it is receiving is reliable and sufficient for them to take actions appropriate to their own circumstances.

    Because the public's perception of the challenge and their response to that perception is of critical importance to us all, the regulators in the industry are taking a variety of steps to communicate our assessment of the situation. Our communications activities have been focused on providing accurate, understandable information to the industry and to the public about Y2K preparations, as well as keeping the media informed. As this year progresses, we will do much more to convey our belief that while no one can guarantee that glitches will not occur, the financial system will be well situated to address the challenge.
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    We hope others will do likewise in their areas of responsibility.

    In closing, I would like to thank this committee for its significant efforts to address the banking system's readiness and for all of its support for the Federal Reserve and the FFIEC. I will be happy to answer any questions that the committee may have.

    Thank you, sir.

    Chairman LEACH. Thank you, Governor Kelley.

    Ms. Tanoue.


    Ms. TANOUE. Good morning, Mr. Chairman, Ranking Member LaFalce and Members. I appreciate this opportunity to update you on the FDIC's progress regarding the Year 2000 in the banking industry.

    The industry continues to make good progress. The overwhelming majority of banks remain on-track to be Y2K ready. This fact should not be surprising. Institutions have a tremendous incentive to fix their systems, to assure their customers have ready access to funds, and to assure that their customers do not suffer inconvenience as a result of Y2K. Simply put, their reputations and futures are at stake.
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    It is unrealistic, of course, to expect that there will be no problems. While some institutions have experienced delays in meeting FFIEC milestones, however, the FDIC's on-site examinations do not bear out some reports predicting a worst case scenario.

    We are now in Phase III of our Year 2000 supervisory program. The FDIC will continue our aggressive oversight of the institutions that we regulate.

    Given the short time remaining until the century date change, we will continue to make regular contact with our supervised institutions to monitor their efforts, and we will certainly intensify our approach against institutions rated less than satisfactory.

    For every institution rated less than satisfactory, or that has a composite CAMELS rating or management component rating of 4 or 5, our examiners will go on-site at least every 90 days, or more frequently, if necessary, with follow-up contact within 45 days. Even the management of institutions that are rated satisfactory will either be visited or contacted by phone every 90 days.

    Further, those institutions that play a critical role in the regional financial structure will, in general, receive an on-site assessment during Phase III. Service providers and software vendors will continue to be contacted every 90 days.

    It is also critically important that customers be well informed about the steps that their banks are taking to prepare for the century date change. The primary responsibility for informing the public continues to rest with the banks. The individual customer wants to know how his or her particular institution is doing. We have repeatedly advised institutions to provide meaningful information to their customers about the progress they are making, as well as when the institution expects to complete its preparations.
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    For our part, to help bank customers understand Y2K and how it might affect them, we are widely distributing educational items to the public, and we have joined with the Conference of State Bank Supervisors on a public education campaign. Every depositor should know his or her insured deposit is absolutely safe.

    Finally, the FDIC has engaged in extensive contingency planning. Our contingency plans are intended to ensure that, should any institution be closed because of Y2K problems, there will be minimal disruption to insured depositors. Contingency planning is particularly important because a Y2K failure may not be similar to past bank failures.

    The FDIC may have to recreate electronic data files and validate information systems before the resolution process can proceed, and we are exploring options for obtaining the necessary data.

    In conclusion, the Year 2000 date change continues to be the highest safety and soundness priority for the FDIC. In addition, I would like to mention that the FDIC itself is on schedule to complete preparations of all our internal systems in time for the date change.

    As we begin the final phase of the assessments, the FDIC will continue to direct to Year 2000 all the resources necessary to ensure confidence in our Nation's banking system.

    Thank you.
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    Chairman LEACH. Thank you, Ms. Tanoue.

    Mr. Hawke.


    Mr. HAWKE. Mr. Chairman, Ranking Member LaFalce and Members of the committee, I appreciate the opportunity to be with you today. My entire prepared statement, which has been submitted for the record, responds to the specific questions that the committee posed in its invitation letter.

    I want to commend the committee and its leadership on addressing these important issues today, and I would like to specifically thank Chairman Leach for agreeing to speak at the Interagency Summit on Contingency Planning and Customer Awareness that the OCC is cohosting this Thursday.

    This morning I would like to discuss the overall progress that national banks have made in making their systems Year 2000 ready and the important role the banking industry and the Government play in maintaining public confidence. For the past two years, jointly with our FFIEC colleagues, the OCC has engaged in a comprehensive program to address the challenges presented by the Year 2000 date change. That program includes providing detailed policy guidance to banks, conducting at least three rounds of on-site examinations at each institution, implementing enforcement programs to deal with deficiencies, and reaching out to bankers and the public to let them know what they should do to prepare themselves.
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    At the OCC, we have assembled a unique, comprehensive database and constructed analytic tools to enable us to monitor closely where national banks stand, and this has enabled us to target quickly and effectively our attention on banks that require closer scrutiny. This database contains the results of quarterly surveys of our examiners regarding the Year 2000 preparedness of the national banks they supervise, using an extensive data sheet designed with the assistance of the Gartner Group. We are able to systematically monitor, not just national banks' overall Year 2000 ratings, but also the status of specific activities and elements of their Year 2000 preparations. One important way in which we use this information is to ensure the accuracy and consistency of the ratings our examiners assign individual banks.

    The vast majority of national banks are making good progress toward being Year 2000 compliant by the June 30 FFIEC target date. In fact, as of March 31, 1999, 96 percent of national banks were rated satisfactory. Through our examinations we have found that a number of national banks have experienced some problems in meeting some of the interim target dates set by the FFIEC. We expected that this would occur. We also anticipate that a small number of national banks may not be able to meet the June 30, 1999, timetable.

    However, as we have stressed in our regular reports to Congress, Year 2000 preparedness is a dynamic process and the ratings assigned to individual banks at one stage of the remediation process are subject to change, particularly as that process moves into the testing phase. It is important to understand that most problems that banks have encountered during the testing phase are not serious, and to a great extent the banks have been able to resolve them quickly. Moreover, it is also important to keep in mind that while the June 30, 1999, target is an important one, the FFIEC chose this date to ensure that there would still be sufficient time remaining in the year to deal with problems coming out of the testing phase.
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    Now let me turn to the critical question of maintaining public confidence. Maintaining close communications between banks and their customers is central and essential to achieving this goal. We are asking banks to keep their customers up to date about the progress that they are making toward bringing their systems into compliance. We believe the best way they can do that is through consistent disclosure of their efforts, and working with local business leaders and media to provide balanced information on Year 2000 issues. For its part, the OCC is participating in FFIEC educational efforts and will be working to supplement those efforts through outreach at the local and regional level.

    In conclusion, given the large number and complexity of systems involved as well as a host of external considerations, some problems are bound to occur, but overall, the banking industry has made admirable progress in getting ready for the century date change. The OCC and the banking industry are doing everything we can practically to minimize disruption and to anticipate and deal effectively with problems that occur. With all of us working together, I am confident that we can achieve this goal.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you very much, Mr. Hawke.

    Ms. Seidman.

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    Ms. SEIDMAN. Good morning, Mr. Chairman, Ranking Member LaFalce and Members. Thank you for the opportunity to discuss the Office of Thrift Supervision's Year 2000 oversight program.

    The thrift industry continues to make strong progress toward minimizing Y2K disruptions to its business and its customer relationships. While this effort is by no means complete, we are optimistic that the industry's Year 2000 transition will be smooth and that problems will be addressed promptly. Our steady examination presence has enabled us to identify those institutions that are having difficulty, and we have and will continue to use our supervisory and enforcement powers to get them back on track.

    I also want to acknowledge the positive response by the industry to the Year 2000 challenge and the serious approach it is taking to address potential problems. No preventive banking issue in recent memory has gotten this much sustained attention from industry leaders, and the concerted and cooperative effort among regulators, industry leaders, trade groups and the Congress on addressing this problem is unmatched.

    The centerpiece of our Year 2000 oversight program is, of course, examining thrifts and their service providers. We began addressing Y2K issues in 1995 and significantly expanded this effort in 1997. We have completed at least three Year 2000 exams of all the thrifts we regulate. Between June 1, 1997, and March 31 of this year, we conducted over 3,700 such examinations of thrifts, and our IT examiners led or assisted on 300 examinations of service providers and software vendors. This work has involved substantial agency resources. In 1998 alone, over 300 OTS employees worked an aggregate of almost 100,000 hours on Year 2000 examinations and related matters.
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    We have seen marked improvement in the thrift industry's preparedness for the Year 2000 rollover over the last two years. While at the beginning of this period, about 15 percent of thrifts were not making satisfactory progress, by the end of our most recent round of exams on March 31 that number declined to less than 5 percent. Most Year 2000 renovations and upgrades had, at the time of examination or follow up, been completed or were proceeding on schedule. Testing with primary and secondary service providers was also well underway; and while work remains to be done on contingency planning and consumer awareness, thrifts are working diligently on these issues.

    Similarly, the Year 2000 efforts of service providers and software vendors that service thrifts appear satisfactory, although isolated concerns do exist. One such concern is, as you know, a credit card processing center for a major service provider. As a result of Y2K concerns at the center, the banking agencies executed a supervisory agreement with the service provider, and we are confident that they will be ready.

    OTS's Year 2000 efforts involve substantial collaboration and cooperation with the financial services industry, service providers, software vendors, industry trade groups, and other banking agencies to make this rollover an electronic non-event with minimal disruption to institution customers. We work with the institutions we regulate on an ongoing basis to increase their awareness and preparation, both during on-site exams and outside the examination process. We also meet regularly, both individually and with our fellow regulators, with small groups of institutions and with trade associations to promote regulatory guidance and best practices. Congress has also played a key role in assisting the banking agencies to address the Year 2000 issue.
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    I want to thank you, Chairman Leach, and the Members of this committee, for your leadership and continuing focus on Year 2000 challenges facing our Nation's financial institutions. We too are especially appreciative, Mr. Chairman, that you will speak at the Y2K summit this Thursday. I particularly want to thank you and your colleagues for securing passage last year of H.R. 3116—The Examination Priority in Year 2000 Readiness for Financial Institutions Act, which is especially important to our efforts.

    I also ask that you seriously consider our recommendation to suspend from October 1, 1999, through March 31, 2000, the effectiveness of Section 6 of the Homeowners Loan Act, the Thrift Liquid Assets Requirement, which, if it remains in effect, could actually act to reduce thrifts' liquidity for Y2K purposes.

    As we enter the final phase of our compliance effort, our strategy will include ongoing off-site monitoring of institutions and service providers, with almost all institutions being examined at least once more on-site. Our approach will be risk-focused to allow us to devote our resources and attention to thrifts receiving substandard ratings, other situations warranting special scrutiny, and industry-wide issues.

    We are moving into yet another crucial period, with public confidence taking center stage. It is critically important not to fool the public with overly optimistic assurances. At the same time, it does no good to scare the public. The confidence that deposit insurance brings to the table cannot be overestimated. No matter what happens, the public must be reminded that their money is safe in an insured bank or thrift and that moving large sums of cash to the mattress is financially foolish and potentially physically dangerous.
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    OTS, on its own as well as in concert with other banking regulators, is expanding communications about the state of readiness of the industry we regulate. Our purpose is to provide added assurance to customers and the general public that the industry is progressing toward the goal of being ready on time for the Year 2000 rollover. Collectively, through the continued efforts of individual institutions, the cooperative efforts of the regulatory agencies and trade associations, and the assistance of Congress, and with the help of the media to cover positive progress the industry is making as well as problems that arise, we should be able to maintain the confidence the public has come to expect in our financial institutions.

    Thank you for this opportunity to testify. I will be pleased to answer any questions.

    Chairman LEACH. Thank you, Ms. Seidman.

    Mr. D'Amours.


    Mr. D'AMOURS. Thank you, Chairman Leach, good morning, and good morning Ranking Member LaFalce and Members.

    We thank you for the invitation and appreciate the opportunity to appear before you today. We think the congressional interest being shown by this committee on this subject is a helpful part of the process toward a happy resolution of the Y2K concerns.
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    Your invitation letter posed a number of questions, and we have answered each in detail in the written statement. Given that most of my testimony, long and in detail, will be an iteration of what has been said, I would like to summarize by saying that credit unions are making good progress toward becoming Y2K ready. Ninety-five percent of insured credit unions met the January 31, 1999 deadline for remediation of mission critical systems. As of March 31 of this year, 98.3 percent of insured credit unions were progressing satisfactorily. The 57 credit unions rated unsatisfactory as of March 31 are receiving special and intense attention. To put some perspective on these unsatisfactory performing institutions, I would point out that they hold less than one-half-of-one percent of insured credit union assets.

    Mr. Chairman, we are reasonably confident that credit unions will be well positioned for the millennium date change. The vast majority have completed Y2K preparations on or ahead of NCUA timetables. I am hopeful that the education efforts of NCUA and credit unions will reconfirm to credit union members that their financial institutions are safe, sound, viable institutions. Still, it is possible that credit unions will face extraordinary liquidity demands if members seek to withdraw extra cash due to some concerns over the date change.

    I would respectfully request your support in our efforts to ensure that the credit union system will have liquidity that it needs to meet such unusual member demands for cash. We believe the most efficient response to this question would be a lifting of the cap on the CLF's borrowing authority as we have requested through the Appropriations Committee.

    That is all I have at this time, Mr. Chairman. I will be happy to answer any questions.
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    Chairman LEACH. Thank you very much, Mr. D'Amours.

    Mr. Burke.


    Mr. BURKE. Good morning, Chairman Leach, Congressman LaFalce and Members of the committee. I am Jack Burke, Commissioner of Banking for the State of Connecticut and current Chairman of the Conference of State Bank Supervisors and a member of the CSBS-led interagency-wide task force.

    Thank you for asking us to be here today to discuss State regulator work to assure Y2K readiness of State-chartered financial issues. This committee's effort on the Y2K conversion has focused needed attention on this important issue.

    I would like to begin by saying State bank regulators are confident that banks will be better prepared than almost all other industries for the Year 2000. But that recognition should not relieve anyone of the need to prepare.

    While disruption in the banking sector should be minimal, problems are possible, and as regulators we plan to be prepared. It is important to note that we already require banks to have disaster recovery plans in place. Recent natural disasters such as hurricanes Hugo and Andrew, flooding in the Midwest, and ice storms in the Mideast, have demonstrated the success of both bank and banking department contingency plans. In these events, banks have been the first businesses to reopen or among the only businesses uninterrupted. Just as we require banks to prepare contingency plans, we are currently developing our own plans in the unlikely event of problems. In coordination with the Federal regulators, our Y2K contingency plans include the efficient deployment of examiners to institutions that might be experiencing problems.
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    Almost all departments have suspended vacation time for key staff. Also departments are already planning to operate on the January 1, 2000, holiday weekend, to be able to react quickly if institutions encounter a Y2K-related glitch and to respond to media inquiries.

    In Connecticut, our Office of Emergency Management will open the State's emergency response center on a 24-hour basis starting several days before January 1, 2000. Departments from Iowa to New York are also making arrangements to operate in alternative facilities in the event that the banking department itself is without power. They are delegating decisionmaking authority to key employees in the field.

    In almost all States, State bank supervisors are working with a Y2K action team that includes other State agencies, particularly the governor's office. In Connecticut, Governor Rowland recently established a comprehensive Y2K task force focused on emergency preparedness. Also in Connecticut, our utility regulators have been closely monitoring utility company Y2K efforts since June of 1997 with the help of a consultant. The early assessment in that Connecticut utility is that Connecticut utilities appear to be in good shape.

    State Y2K coordinators and State emergency management officials have been meeting with FEMA to coordinate their emergency response plans and to make sure their systems are ready for any possible disruptions. State and Federal regulators are coordinating communications outreach to local media and communications groups.

    As we pursue our efforts to make sure that banks are technically prepared for the century date change, our greatest challenge becomes one of maintaining public confidence in our banking system. As an example, our banks may be Year 2000 ready, but could have liquidity problems if everyone decides to withdraw funds on the last business day of 1999.
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    As a community of regulators working with the industry, we are looking ahead to plan for these collateral challenges. The primary responsibility for communications about the Y2K preparedness of individual banks lie with the banks themselves. For the most part, the industry and their trade associations are doing a very good job in this area. Bank outreach efforts have included newspaper and radio advertisements, town meetings, statement stuffers and several less traditional approaches. We have heard of banks holding the ''time travel'' day in which they reset their computers and clocks to January 1, 2000, and invite customers to check their account balances. We know of a group of banks in New England that have made arrangements to pool their cash in case demand exceeds supply of an individual institution. One California State charter bank even uses a ''Marching Moneybags'' precision drill team to inform its community about its Y2K readiness.

    But we as regulators can and should be talking about the industry efforts in the aggregate. We walk a fine line between boring people and alarming them. We want to reassure the public that the industry and its regulators are prepared for any unexpected contingencies while giving consumers the information they need.

    To give consumers the necessary information, we published a plain language Y2K guide, which we recently sent to every Member of Congress. To further educate the public, we are also launching joint State-Federal Y2K outreach programs, as the Chairman mentioned, beginning with the FDIC in New York State later this month. Other programs are planned for several different sites around the country including Florida, Arizona, and California.

    In conclusion, I emphasize that CSBS believes that the banking industry will be prepared for the century date change. However, it is always a good idea to prepare for the what ifs. I would be happy to answer any questions that the committee may have.
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    Chairman LEACH. Thank you very much for that testimony. I might just say it shows that the State bank supervisors are very much on top of the flexibility needs that may be coming down the pike.

    I would like to begin by turning to Ms. Tanoue, who is the only one who has raised in this hearing a very interesting issue that I have not considered until the last several weeks, and that is you use the word ''scam.'' I would like to raise it in this sense. Everybody knows there is a Y2K problem, but I have a sense that increasingly some people are trying to use the Y2K problem to suggest to individuals that they might invest in some alternative vehicle, whether it be silver or gold or whatever scheme one might have in mind.

    And my only reaction to this is I think the public should be very much alerted to that kind of suggestion that because of Y2K, one should invest in something which usually is a nonliquid circumstance. If one believes Y2K is a problem, one should presumably want to be fairly liquid, holding assets in the bank account, for instance, and to invest in someone's scheme is probably the exact opposite thing one should want to do.

    And so I would like to ask Ms. Tanoue, because she raised the issue, and Governor Kelley, because he is in charge—or his institution is in charge, of aspects of the Federal economy, to comment.

    Ms. Tanoue.

    Ms. TANOUE. Thank you, Mr. Chairman.
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    In our testimony, we did point out the fact that we anticipate that there may be cases of Y2K fraud or swindle, and we feel it important to alert the public that they should be aware of this potential and that they should remember the classic signs of a swindle. If a deal seems too good to be true, it probably is.

    We would also try to remind the public that their deposits are insured when they are in the bank and not when they are out.

    We also are giving a number of consumer tips to the public just so that they can be safeguarded against potential cases that might arise, and several of the tips include things like don't give out bank account numbers or other personal information to anyone unless you have initiated that inquiry. Thoroughly check out any offer to buy or invest in a product before you commit, and if you spot a fraud, take the time to report it to police, to the National Fraud Information Center, or to your financial institution. In other words, ''caveat emptor''—buyer beware.

    Chairman LEACH. Governor Kelley, would you like to respond to this?

    Mr. KELLEY. Yes, thank you. I can add very little to what you yourself said as part of your question and also what Ms. Tanoue said, and I certainly concur completely with both of you. I only add this point, that I think that such an action by an individual would have to be made only on the premise that our payment systems are going to fail. That is why they would want to go to some alternative investment, however defined.
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    We have a very high level of confidence that our payment systems will, in fact, be functional. While there could be temporary isolated inconveniences or problems, basically we are of a high level of confidence that our payment systems will work and will be functional. And as a consequence, there is no incentive whatsoever for the public to go to some alternative scheme of where they should place their funds. And as I said in my testimony, and others have said, the safest place for one's funds is in an insured bank account.

    Chairman LEACH. Let me go to the liquidity question for a second, Governor Kelley. It is my understanding that the Federal Reserve is quite prepared in terms of printing of money, in terms of the distribution of money through normal channels, and that you are working in particular with new arrangements with the credit union community. Is that correct? And can you give us a timeframe upon which those arrangements may be prepared?

    Mr. KELLEY. We are working closely with the credit unions. I would hope that we will have a firm plan in place in the very near future. I do not have a deadline date on that, but I believe that can be done fairly soon. Discussions are well advanced on alternative ways for the Federal Reserve to provide that backup should the CLF not become available, and while we are not firm on exactly how that is going to be done now, we believe that it can be done in a fairly inexpensive and reasonably efficient manner, and we are working very hard to do that.

    Chairman LEACH. Is it your belief that the arrangements that you have under review are preferable to or less preferable to expanding a current provision in law that relates to the Central Liquidity Facility, the so-called CLF?
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    Mr. KELLEY. I think in the present context, the contingency context, the simplest and most straightforward way to handle that would be to expand the CLF. That is an infrastructure that is in place and could be carried forward quite simply. That has not been able to be advanced for various reasons, and as a consequence we have undertaken to prepare alternative plans which I think will certainly work.

    Chairman LEACH. Let me just say from the committee's perspective, and I will conclude with this observation, that we will have under review several types of approaches, but we certainly would like to see the Federal Reserve and the credit union movement reach agreement as soon as possible whether or not the particular approach that you reach agreement needs to be utilized, and I think the earlier the timeframe that can be developed, the better.

    Mr. KELLEY. Yes, sir. I completely agree, and we are proceeding on that assumption.

    Chairman LEACH. Thank you.

    Mr. LaFalce.

    Mr. LAFALCE. If any of the regulators wish to comment.

    You are an ordinary consumer. You use bank services. You use credit union services, and so forth. You have one of two choices or something in between. Number one: you can just not be concerned about this so-called Y2K problem. Leave it to the panelists to deal with, the regulators to deal with. Or you could panic; or somewhere in between.
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    What do you think the appropriate attitude should be of the intelligent consumer of depository institution services? Anyone?

    Ms. Seidman.

    Ms. SEIDMAN. I think there are a number of things that an intelligent consumer can and should do. First and most important is to keep financial records. I know it is so tempting when you use the ATM machine to just throw away the receipt, but sometime toward the end of the year, it is going to be really important to start saving those things.

    And similarly, it is going to be important for people to keep records of both their deposits and investments and their loan payments and transactions somewhat more carefully than they tend to do under normal circumstances.

    The second thing I think is to work with your financial institutions, ask them questions, find out where they are, listen to what they tell you.

    Mr. LAFALCE. Wait a minute. You have got somebody who goes in to cash a check, and they just want to get their money. How are they going to work with their institutions?

    Ms. SEIDMAN. Well, I think that one of the most useful things that some of the institutions and the trade associations are beginning to do is to really start training their tellers to answer Y2K questions, answer them intelligently, and answer them in a way that builds confidence. And I noticed the America's Community Bankers have this ''Ask Me About Y2K'' campaign going on, which I think will encourage people to ask those questions. Obviously it will be extremely important for the people that they ask questions.
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    Mr. LAFALCE. I can't imagine any clerk saying anything other than ''we don't know what it is like at other institutions, but you are safe at ours.''

    Ms. SEIDMAN. I think they will, but some of the people you will hear from this afternoon or later this morning are doing very well with their customers because they have taken the initiative to tell their customers how ready they are and to tell them in a convincing manner. So that is the second thing.

    The third thing, I think, goes back to what Chairman Tanoue said, which is to watch out for scams and frauds. It is a very tempting thing for some people who are concerned to react to people who say, ''Well, just give me the money, and it will be safe.'' The money is safest in your financial institution. It is earning money, and it is physically safe.

    And then finally, I believe credit cards will work. I believe we are making every possible effort to make sure they will work. But if you are concerned, take money for a long weekend, but don't take any more than that. We don't need the kind of panic that will be engendered if everybody feels they need just a little bit more.

    Mr. D'AMOURS. Congressman LaFalce, if I may very briefly, I think the best answer to your question—I know you are positing an average workaday consumer who isn't very sophisticated in the ways of financial institutions. I think the answer is if what you and Chairman Leach and others have been saying is repeated often in the press, what other members of this panel have just said is to communicate the idea that your money is safest in a financial institution and that it should stay there. That needs to be communicated much more loudly than it has. I have heard it in this room. I frankly haven't heard it much in the general press. If we could get that ball rolling, and if the general press could pick up on those statements quoting the Chairman of the Banking Committee and the Ranking Majority Member, I think that would go a long way.
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    Mr. LAFALCE. I am not sure what that means, though, Mr. D'Amours. Do you mean it is safer in an insured depository institution than it would be in a money market account, Morgan Stanley or Merrill Lynch or whatever?

    Mr. D'AMOURS. I think the point to make, Mr. Ranking Minority Member, is your money is safest where it is if it is in an insured depository institution, and there is no need or reason to move it anyplace else. If that matter could be communicated so that it penetrates in the minds of the general public.

    And if I may, on the question of scam that the Chairman raised, we have not heard of any credit union-focused scam, but NCUA does sit, as we all do at this table, on a FFIEC Y2K fraud group that is in the process of collecting information on this kind of behavior; and as we receive such information, we pass it on to our examiners and to credit unions. So there is activity being taken in FFIEC to address this question.

    Mr. LAFALCE. Of the Fed and the OCC, we have been focusing on domestic financial institutions. Of course, we do have a number of foreign banks with domestic branches in the United States. My question is larger than that, but it starts with that. To what extent might Y2K difficulties in other countries affect domestic branches of these foreign banks? Also, to what extent would interfaces of any United States financial institutions with foreign institutions have an adverse effect? And to what extent are we monitoring that situation, attempting to coordinate our efforts internationally, whether it is with the European community over the end date of the year, or whether it is with the Asian banks or the South American banks, and so forth.
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    Mr. KELLEY. Congressman LaFalce, the foreign agencies and the offices of foreign banks here in the United States are being held at the same standards of preparation for Y2K that our domestic institutions are, and they are meeting those standards. There is the obvious complication you mentioned that they are dependent in some cases on systems that go back and originate in their home countries and their home offices. And in that connection, we have been in contact with the regulatory authorities in other countries where there has been any question on the part of our examiners about the possible problems of coordinating home-country services with American services. Those discussions have been expansive and are ongoing. Certainly the operation of American banks overseas has been a part of the examination process that has been going on that we have all discussed here over the course of the morning.

    As to your reference to flows of funds internationally, the overwhelming majority of those funds are conducted through a relatively small set of quite large and quite sophisticated financial institutions, a large number of them United States-based, but not all. And those firms have been doing a good job as far as we can tell. Certainly the ones of the United States have been inspected closely, but we also believe that those foreign firms that are very active in international financial flows are doing a good job of getting themselves ready. And, of course, the private sector firms are doing a self-policing job in the sense that each one is examining the relationships with their counterparties that they do business with, and that is perhaps the best assurance of all that they will all be comfortable with doing business across the millennium with each other and that those funds are going to flow well.

    One other thing that I would add is that those funds are transmitted internationally through several private-sector-operated payments conduits. Those are all being examined closely by a consortium of central banks from all of the concerned countries and those operations, such as S.W.I.F.T., appear to be doing a very good job of getting themselves ready.
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    Chairman LEACH. Thank you.

    Mr. Lucas.

    Mr. LUCAS. Thank you, Mr. Chairman. I guess my question to the panel is: The pronouncements that any financial institution can make about their readiness are only as good as the information that is available to them. Could you address, just for a moment—anyone who would care to—how adequate you feel the providers of critical services have been to these institutions, whether it is telecommunications, utilities, whatever, how straightforward and adequate they have been to the financial institutions they serve and, therefore, the quality of those pronouncements?

    Ms. SEIDMAN. Let me just say in the case of the institutions we regulate, and I have been out in the field talking to a number of CEOs, particularly CEOs of fairly small institutions, the situation is mixed, but it appears to be getting somewhat better. There appears to be somewhat more information being transmitted. I believe Congress's passage of the disclosure law last year has definitely helped. I am hopeful that after the June 30 readiness deadline that most of the other industries have imposed on themselves, they will be even more forthcoming.

    We are urging our institutions to band together geographically with not just their fellow thrifts or their fellow banks, but with everybody in the geographic area and to work with their State utility commissioners to try to get the maximum amount of information on these issues. It has not been universally forthcoming. I will say it is getting better, and the President's Y2K Council with whom we have discussed this, is also working on this issue to try to improve the flow of information.
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    Mr. LUCAS. The panel today and my colleagues today have made several points basically as a message to the American people to be considered, and I think I have a responsibility to pursue that line too. And if the panel, anyone on the panel, would care to offer an observation, I would be most appreciative.

    But one of the things that the American public needs to bear in mind: The people who have the most at stake in this whole process, who have the greatest incentive and need to make sure that everything runs in the fashion that we all believe it will be, are the folks who run those financial institutions. After all, for what—250 years in this country, maybe 500 years as we have known something remotely resembling banking or financial services—it is the faith and trust of the customer that is the underlying strength of any institution, and there is a huge incentive for every financial person to do his or her absolute utmost to avoid any problem to maintain that confidence among their depositors and their customers. And sometimes I think that gets lost out there with the general public. It is in every banker's best interest that everything go just as smoothly on Saturday morning as it went on Friday afternoon. And I think it is a message we need to get across.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you very much, Mr. Lucas.

    Mr. BURKE. May I comment on that?

    Chairman LEACH. Yes. Mr. Burke.
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    Mr. BURKE. I think it is important for you to hear that one of the emphasises that has happened in a number of the States is that direction has been given to the boards of directors of these institutions that they are accountable for this. They are not to leave it to the techies to solve the problem. It is their responsibility to reassure the public. And I know specifically in Connecticut I have been in communication with every board member of all of our financial institutions through a letter informing them of this obligation. So I think it is important it be at that level.

    Mr. LUCAS. Absolutely, Mr. Burke. I would also like to note in my own district I have been impressed by the contingency plans, the preparation to shift the issuing of bank statements by a couple of days to provide a more accurate printed record. They are out there in every part of the financial industry scrambling to make sure all bases are covered. The American public should take time to understand that, while it may be exciting, some of the side stories we read on the mysterious internet web sites, nonetheless, the financial community is doing everything within their power to be responsible and to be prepared.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, sir.

    Mr. Vento.

    Mr. VENTO. Thank you, Mr. Chairman. I thank the witnesses. Financial institutions, of course, make their living on the basis of being safe and sound. That is, you know, that is why in fact, of course, there has been such an interest in maintaining that image. Unfortunately, I think to such an extent that we have portrayed that, we don't always look at where the mistakes are. For instance, there are financial institutions in Minnesota that, on occasion, run out of money. They don't have enough cash on hand because they don't anticipate a problem. And/or there are computer glitches and other wire transfers that sometimes go down. Now, you all know that as regulators, but the fact of the matter is, when that does happen on January 1 of 2000 or thereabouts, the fact is that the public has the perception that this is the start of something big. It could, in fact, create some other problems.
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    So that is something to keep in mind, I think, with regards to this and I don't know—you know, obviously you try to overcompensate, prevent this particular problem at this time, but these instances do occur. And I don't know how we—I don't think most of the institutions in my area are running around saying, ''Yeah, we ran out of money last Friday on payday.'' This is one of the concerns, I think, that we have done such a good job portraying stability and solvency to the point of covering over some of the issues that might legitimately occur.

    The financial institutions have become so dependent upon, of course, wire transfer and computer. The issue here is, of course, we are talking about problems of accident or problems of omission where someone fails to do something. Of course, I think sometimes half the world is working in computers. The last time I looked they have got half my family and others working and I am trained in history and working in computers.

    But the issue is we have become so dependent upon that that many individual service providers that may be holding themselves out as in fact rewriting the software programs for this hard drive and that in fact are performing that service, and this, of course, goes to multiplicity of credit card companies and other intermediaries before it ever gets to the bank. Has there been any—obviously there has been some work in terms of making certain that those that are relying upon these services are actually providing a qualified service. Has there been effort on the part of the financial institutions examination council, Mr. Hawke, along those lines?

    Mr. HAWKE. Yes, Mr. Vento. The effort with respect to servicers has been just as intense as it has with respect to banks. They have been given exactly the same kind of scrutiny.
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    Mr. VENTO. Have there been individuals or firms that have been determined to be unqualified to perform the services that they perform? I would be interested.

    Mr. HAWKE. I wouldn't say unqualified. But I think the predominant number has been deemed to be satisfactory in their compliance. But the important point is they have been getting exactly the same scrutiny that banks have been getting.

    Mr. VENTO. The other issue, of course, is we just picked up the paper the week before last and we had ''Melissa'', the virus, the encryption. Could anyone on the panel speak to the security and encryption nature? Omission is one thing. Commission is another. I don't know what the reason for individual hackers making a practice out of what they make a practice out of is, but they seem to be able to invade any code. And it seems to me that this is almost an engraved invitation to prove their technical ability to, in fact, break this system. Mr. Kelley, have we given any thought to that?

    Mr. KELLEY. Yes, sir, we have given a great deal of thought to that, not only in the Y2K context, but always. This is always a tight focus of those of us who are responsible for payment systems because clearly any sort of a virus incursion would be of the greatest significance at any time and certainly now in Y2K. The payment systems are all conducted on an encrypted basis. Many of them are done on closed systems. We are constantly running tests where outside experts try to penetrate the security systems that we have in place to protect the payment systems, and we are assured and reassured periodically that the security of the payment systems from electronic intrusion is very, very strong.

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    Mr. VENTO. In this case, of course, it would be absolutely catastrophic if, in fact, there was a success with something like this ''Melissa'' or whatever that was which occurred a couple of weeks ago.

    Mr. KELLEY. Of course, you are right, it would be, but I don't believe that there is very much probability at all. The very, very smallest probability that such could happen inside the payment-system flow.

    Mr. VENTO. Anyone else have any comments on that particular issue at this time?

    What is the intent—obviously there is a suggestion not to move the date around, but what is the intent on the first, which is a Saturday, the second a Sunday, I believe? Will, in fact, the financial institutions be, in fact, verifying the workability of their systems at that time? Is it the intent that they would actually be verifying the workability and functioning of their systems although not open for business at that point? Can anyone give me any insights into that?

    Mr. BURKE. I can respond at least from Connecticut and I know from a number of other States, we set up a system with all of our State-chartered institutions, there are 68 in number who will call us, we have given them five numbers to tell us positively on the first that they are up and operating. It is not a negative. We must get a notice from them verbally that they are operating positively. We are not going to wait to hear there is a problem. We want to know ahead of time they are all OK, and we will do this on the first and second.

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    Mr. VENTO. They will actually be operating or trying to function?

    Mr. BURKE. That is correct.

    Mr. VENTO. I know there is modeling going on right now. The other issue, Mr. Kelley and others, on this virus and encryption process, I would like to know what type of actions, for the record, in terms of numbers of enforcement and so forth on cases prosecuted with regards to that that have occurred. Obviously there arose a problem with currency, the ''Melissa'' issue last week as they attempt to go to court on it, but I would like to know, because it seems to me that obviously your intent here is principally focused on trying to prevent individuals from withdrawing funds they don't have and fraud and so forth. In this case, of course, the problem is somewhat different in terms of an intellectual exercise for somebody to strip the entire system.

    Mr. KELLEY. Mr. Vento, I am unaware of any penetration. I could be subject to correction here, and I certainly will get back to you if I am in error. But I am unaware of any penetration by a hacker of any of our payment systems. There was an incident a few years ago where a private closed system within one of the very large international banks was penetrated and there were funds diverted, but as I recall that instance, I do not believe that even that one involved the penetration of one of our payment——

    Mr. VENTO. If you are dealing with attempts, I am interested in what type of legal remedy or prosecution. The fact that the system had not been breached is obviously good news to all of us, but I would be interested in knowing what the remedies are in terms of what has occurred in terms of prosecution.
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    Mr. KELLEY. Obviously it is against the law to do that if someone tries it and is caught and convicted of it. But I am unaware of court cases that would involve the payment system. If I am in error of that, I will get back to you.

    Mr. VENTO. That is why I asked you to answer for the record, and others, because I didn't anticipate there would be. I don't want to put any ideas in anyone's mind, but I think they are out there already. I appreciate your reassurance of the ability to have avoided those particular problems, but I think it could be a major target. As we move in that direction, I am pleased that you are responding positively.

    Mr. KELLEY. We have been very concerned about that possibility and have been discussing it and preparing to protect against it for actually several years now. As I said a moment ago, this is an ongoing effort to make sure that the security and credibility of our payment systems is intact at all times, but we have been aware for a couple of years now that the Y2K context would be a particularly inviting target, and we have been working very hard to make sure that we are secure against that.

    Mr. VENTO. Mr. Kelley, you have taken the lead in answering this, but if anybody else had anything for the record they wanted to provide to assist and to reassure the committee, I think it would be helpful, Mr. Chairman. Thank you.

    Chairman LEACH. Thank you very much, Mr. Vento.

    Mr. Cook.
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    Mr. COOK. Thank you, Mr. Chairman.

    One of the concerns that customers might have is whether they can count on direct deposit of Social Security checks or employee paychecks in January of 2000. Can you assure customers that those deposits, those payments won't be interrupted and if not, should the Social Security Administration or private employers or, particularly, financial institutions themselves have some plan or response to that potential concern of some citizens?

    Mr. HAWKE. Mr. Cook, I can say from the point of view of the bank regulators the banks will certainly be prepared to receive direct deposits. I think your question is an important one, and I think it is best addressed to Social Security. I know from my conversations with people at Social Security that they have been making very significant contingency plans, and they are prepared to assure Social Security recipients that they will get their Social Security payments on the date that they are due. But I think they are probably better informed about exactly what those contingency plans are going to be.

    Mr. COOK. I would like to follow that up. Something that I think some of your customers might be concerned with believing that you have got your Y2K problems solved, that maybe the Social Security Administration doesn't, or maybe the power company, that might affect your computers doesn't. But particularly on that Social Security question, I was just wondering if the financial institutions might consider something like assuring some of their senior citizen customers that if there is a problem with the Social Security Administration, they have a plan that could—after all, the banks aren't too worried about the Social Security Administration I take it. I am looking for something that the financial institutions themselves could do to maybe assure their own customers of additional problems that go beyond what might be a bank problem.
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    Mr. BURKE. Mr. Cook, may I comment at least from a State charter point of view? The banks are looking at the possibility of advancing money within the confines of safety and soundness, of course, if there is a problem with delivery of those checks. They are looking at that, and I think, as regulators, we have to look at it to be sure that it doesn't put the bank in any jeopardy. But I think it would go a long way in reassuring the public in the unlikely event that there is a problem with Social Security, you still have access to some of your funds. It really would be kind of a non-interest bearing loan for a short period of time or something like that. They are reviewing this possibility.

    Mr. COOK. Thank you. In fact, in that connection something that Ms. Tanoue mentioned, are the financial institutions appropriately addressing security issues that might result from increased cash on hand to meet the Y2K customer demand? In other words, there was some discussion of those vacation withdrawals being a little higher than expected, the normal, during that time. And I am just wondering how much of a problem is it with customers with bag loads of cash around your banks right around that time. I am just wondering what planning has gone into security questions and the safety and soundness questions that might come up as a result of what you were saying, Mr. Burke, and also people withdrawing that extra money, maybe.

    Ms. SEIDMAN. Let me say that in my discussions with bankers, first of all, from our perspective, one of the elements of a cash plan, contingency plan is the security element for the bank. It is not only security officers, it is vault size, it is vault security, it is insurance. It is the whole range of issues that come if you have more cash than you normally do. Bankers are very, very concerned about the physical security issues that will arise if people start withdrawing large sums of cash.
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    Many bankers I have spoken to intend to try to have extra security guards. But the fact of the matter is that once people get beyond the perimeter of the bank, the bank cannot be responsible for what in essence becomes a public safety issue. This is another reason why it is extraordinarily important for us to all work together to convince people that taking money out of the bank is not what they ought to be doing.

    Mr. COOK. Thank you.

    Chairman LEACH. Thank you, Mr. Cook.

    Ms. HOOLEY. We have heard that you have all made progress in this area and you are feeling pretty comfortable about what is going on and I don't have any reason to think anything else and I am pleased to see the progress you have made on this issue. My question is, and some of you—I know you, Mr. Burke, you talked about well, these are some of the things we are doing to inform the public. I guess I would like to hear from the rest of you what are we doing to educate the public so that there isn't a run on the banks and so that they have confidence in the banks so they don't take out that extra money for vacation just in the month of December or just before January 1.

    So what are you doing to educate the public and are we doing enough? And is it uniform or is it hit-and-miss? Any one of you.

    Ms. TANOUE. Perhaps I could answer that initially. I think the primary thing that we are doing is to encourage the institutions to have customer awareness programs in place. An important part of such programs is to educate consumers about the preparations that banks have been making for some time now and really providing them with information so that they can act with common sense and with perspective. Part of that awareness program is to remind consumers about FDIC coverage and reminding them that insured deposits are absolutely safe.
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    Ms. HOOLEY. Is that going on uniformly and I guess—let me tell you one of the reasons I ask this question. Certainly there have been articles in the paper. There have been discussions amongst friends and individuals. I happen to have some accounts both in banks and in credit unions, and I may have gotten information. I do most of my banking by mail like most people anymore. I haven't seen—don't always read the brochures that come inside of my statements which I think what most of us do is not always read what we get. I am trying to—to my knowledge I haven't gotten anything. And is this being done—you talk about encouraging people, but is this being done with any kind of systematic regularity? And is it being done throughout the entire industry, or is it on a hit-and-miss basis?

    Mr. HAWKE. I think it is being done uniformly. At least it is being done pursuant to uniform guidance and mandates from the banking agencies. Customer communication policies are a very important part of the entire Y2K effort. I am probably like you in pulling out my bank statement and throwing away the rest of the envelope, but I think that in most of the envelopes institutions are sending out there is something about Y2K.

    Ms. HOOLEY. I am going to check mine a lot more carefully I can tell you.

    Mr. HAWKE. I think you raise a very important question. One of the things that we have to get across is the intensity and scope of the regulatory oversight of financial institutions' Y2K preparations. I don't think there is any other industry in the country that has gotten the supervisory scrutiny that the banking industry has gotten.

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    Keep in mind that every bank will have gone through three on-site examinations devoted solely to Y2K. There is an elaborate schedule of time deadlines and benchmarks that financial institutions have to meet. They are rated quarterly on their performance, and the agencies are focusing very intensely on those institutions that are not up to par. And as we pass the June 30 deadline for testing and implementation, the agencies will be able to identify those institutions, and I suspect there is going to be a very small number that will not meet that deadline.

    So I think the main reason for the public to be confident is the tremendous intensity of the supervisory effort. I think our banks are going to come through with flying colors, and I think the public has to know that.

    Ms. HOOLEY. And if I may just follow up. Let us assume that you have informed the public appropriately. You have taken all of the precautionary steps that you can take in terms of not having this be a problem. And let us say everything that could go wrong went wrong. Do you have contingencies for that?

    Mr. HAWKE. There is extensive contingency planning going on on an interagency basis. There are ten task forces addressing different aspects of contingency planning, and they cover the spectrum of possibilities. There is an enormous amount of effort that has been put into contingency planning.

    Ms. HOOLEY. Thank you.

    Chairman LEACH. Thank you, Ms. Hooley.
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    Mrs. Biggert.

    Mrs. BIGGERT. Thank you, Mr. Chairman. I would like to follow up just a little bit on the question that Mr. Cook asked. Of course, I can't really speak for a Federal agency, but due to the numerous Y2K hearings that I participated in, I know that at least GAO and the President's Council on Y2K and the Government Reform Committee has rated the Social Security Administration as an A on their report cards and certainly they were the first Federal agency to really reach mission-critical compliance.

    So I think that the step that I still didn't see an answer to is that if those checks are direct deposit, what happens? Is that really the responsibility—I don't think that is really the responsibility of the Social Security agency, but I think the public needs to be reassured that those deposits will be available as well as people's mortgage payments. They need to be assured that those will be made, and that other deposits will be available to them. But I think from what I have heard and the bank industry certainly has, I think, taken the lead in the private sector as far as addressing these issues early.

    My concern is something like this that comes in the mail to people, that there is a panic that will occur unless we keep that before the public and to maintain that confidence that things are being done. I know in one of the hearings we had for emergency preparedness and the talk there was really that there—in case there is a glitch, to treat it like an emergency, like a snowstorm, like a hurricane or something that is going to happen so that if there are glitches, people will be prepared. And some of the things were to have bottled water for a week or two, have canned goods, and those kinds of things. What should be that emergency preparedness that banks should look for in the event of a seven-day emergency or a three-day emergency?
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    Mr. KELLEY. Let me start out there, Mrs. Biggert, if I may and others may want to chime in. You have covered the waterfront of a number of different potential problems. Certainly we would all concur that the type of scare books and horror stories that some people are trying to promote, and mostly for their own profit, are a concern. We simply must do everything we possibly can to prevent that from becoming the conventional wisdom in the public's mind, and that is what we are talking about here.

    In the case of Social Security and other type payments, the Social Security Administration has announced, as you suggest, that they are ready. Those payments would flow in the case of direct deposit overwhelmingly through what we call the automated clearinghouse or ACH payment system, one of the payment systems that is either totally or largely conducted by the Federal Reserve. And that is one of the exact payment systems that I had in mind a few moments ago. I think I have said it a couple of times, that we have every confidence that the payment systems are going to be ready. In the case of the Federal Reserve, we have done everything that is humanly possible to do to ensure that the Federal Reserve payment system as a conduit for payments will be ready.

    The final step is the individual bank that the customer has a relationship with, and we have been talking about that, of course, all morning also, that each individual bank is undergoing extensive preparation. So again, as we would all say, while no one can guarantee that there won't be a glitch here and there, I think that the public can be assured, and I think it is all of our responsibilities to provide that assurance that every precaution is being taken and every preparation is being made to ensure that there will be no disruption in those flows.

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    Mrs. BIGGERT. When you are talking about the tests have been made and several of the members of the panel have used the word ''satisfactory,'' looking at again the Federal agencies, we talk about their mission-critical systems are compliant. What does satisfactory mean? Is that all systems, that there needs to be more end-to-end testing, or that if they are compliant you are not going to worry about those after the final date of June 30?

    Mr. HAWKE. Satisfactory is a rating that is given with respect to the bank's progress in meeting a whole series of benchmarks that have been set by the FFIEC.

    Mrs. BIGGERT. Does that mean all systems or is this—like mission critical? Are there some systems that you really——

    Mr. HAWKE. Mission-critical systems.

    Mrs. BIGGERT. Thank you. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mrs. Biggert.

    Mr. Inslee.

    Mr. INSLEE. Thank you Mr. Chairman. Listening to all of your comments seems to give a high level of confidence to substantial work going on in the industry, and it sounds—from listening to your comments, it is almost a situation that what we really have to fear is fear itself in this issue. So the real issue becomes liquidity from listening to your testimony. And I would like you to tell us how you, as various regulators, have gone about trying to decide what an adequate level of additional liquidity is required. Is there polling that has been done? How are you going about trying to predict how the public is going to respond to this? What percentages, for instance, if you can express it in percentages, you believe the whole system should have as far as additional liquidity?
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    Mr. KELLEY. I think it has been impossible to predict with any confidence as to what the level of additional liquidity might turn out to be. And as a consequence, we are prepared to meet any demand that may show up either in terms of the availability of cash or the availability of other forms of funds.

    The Federal Reserve, for its part, stands ready to supply liquidity to the system, either as a whole system through open-market operations or to individual institutions under appropriate circumstances through our discount windows, and certainly in the case of cash as the ultimate form of liquidity, we understand that we have a responsibility to meet any demand for cash on the part of the public. And we will be prepared to do that. The challenge is going to be in the case of cash to ensure that we are able to handle any last minute rush between Federal Reserve vaults and your local ATM or Safeway store. And a great deal of work is going forward on the part of the Federal Reserve and the individual Federal Reserve banks across the country and individual financial institutions whose responsibility it is one-by-one to provide for the necessary cash requests of their customers. But cash will be available to the banks, and we will help the banks to make sure that it is in the right place at the right time.

    Mr. INSLEE. Thank you. Anyone else want to add anything to that?

    What—if you can tell us—you have told us that there is this high level of compliance, 95 to 98 percent essentially with your relative requirements, which is—sounds like an awful good number sitting on this end of the desk. But apparently there are some outliers, if you will, at least at the moment; you hope there will be none by the end of the year. But are there plans for consumers to be made aware of those outliers, if you will, in the event that we get toward the end of the year and we still have some percentage who are not compliant with existing plans and requirements? In other words, will there be any regulatory requirement that consumers be advised of those folks who have not taken their fair share of responsibility with the remaining part of the industry?
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    Mr. D'AMOURS. I would like to suggest, Congressman Inslee, at that late date it may be a matter of notifying the members of credit unions that the institutions being liquidated are merged.

    Mr. INSLEE. That is not an insignificant answer.

    Mr. BURKE. I think it is important to know that all of us, Federal and State together, are not looking at January 1 as a deadline date. It is really June 30 or July 31, and we will know by then. And action needs to be taken by all of us whether State-chartered institutions or Federal institutions to correct that institution, and it could mean what the Chairman said. But that would be done in the interim so that helpfully come January 1, anybody that is not in appropriate control of what is going on with Y2K would have been handled far ahead of that advanced stage if everything goes the way we hope it does.

    Ms. SEIDMAN. In addition, we are working on issues like the transferability of certain systems so that if you run into a situation where an institution has a definable problem with a single system or something that is just causing a temporary problem, that there will be ways to deal with that far short of liquidating a solvent institution.

    Mr. INSLEE. Thank you.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you very much.
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    Ms. Schakowsky.

    Ms. SCHAKOWSKY. Thank you, Mr. Chairman. I am feeling a bit less sanguine, I think, than my colleague. That may be because I just met with some industry leaders trying to convince me of their need of liability protection. By the end of that conversation I was ready to hoarde food.


    I also know there was a Newsweek Magazine survey that found that about four in ten American businesses have already experienced some sort of a Y2K related computer failure, inability to process credit cards after the Year 2000 or that computers read ''99'' as a shutdown code and I know we were careful around April 9, 1999, to look for some glitches. So certainly there are potentials and you have mentioned some of them. The Coalition for Consumer Rights, a wonderful consumer organization in my State, looked at some of these numbers, and if I match them against yours, Mr. Hawke, in your testimony, you say that national banks and Federal branches with assets over $1 billion, 88 percent first quarter 1999 were ''satisfactory,'' meaning, I guess, 12 percent were ''needing improvement.'' That is the category you have, ''needing improvement.'' About how many institutions is that?

    Mr. HAWKE. There are 184 banks in that overall category of banks with assets in excess of $1 billion, so 12 percent of 184 would be roughly 20 banks or so.

    Ms. SCHAKOWSKY. And if you look at overall figures of needing improvement and what are we talking about essentially? About 6,000 banks total in the whole universe. Then we are talking about 180 to 240 banks that may be, at least as of today, non-compliant or something to worry about. And in terms of thrifts, you mentioned 5 percent were yet unsatisfactory. So when we talk about things like mortgage payments could be garbled—let me read some of the concerns that the coalition listed: ''Inability to access assets held in checking or savings accounts through automated teller machines or directly from live tellers.'' Since we are talking about eleven million ATM transactions in 1997, probably way more than that now, we certainly do need to be concerned about that. And you talked about training tellers, but it is pretty hard to answer the question ''Why can't I get my money?'' I don't care how you train a teller. That would be a really tough one to handle. You want to answer?
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    Ms. SEIDMAN. First of all, let me make sure I'm clear that the 5 percent number was the number that was not satisfactory. All but one of those institutions are in the ''needs-improvement'' category, not the ''unsatisfactory'' category. We have taken supervisory action against the one. We all are very busily working through the stable of needs-improvements and unsatisfactory entities to make sure that they get back on track.

    And whenever we run into that situation, we immediately move into a very intense program with the board of directors. We move into a very intense program of follow-up examinations both off-site and on-site. The whole purpose of setting the benchmarks relatively early in the year, setting the benchmarks December 31, March 31, June 30 was, in fact, to give us time to really push those last laggards across the finish line well before the Year 2000.

    Now, it is reasonable for people to be concerned about the things that these folks are concerned about, and these are the questions they need to be asking their institutions now. Obviously on January 3, it is going to be a little late to ask the question about how do I get my money. On the mortgage side, let me also say that there has been very extensive end-to-end testing through the Mortgage Bankers Association with institutions that service well over 95 percent of all the mortgages in the country. And I am told that testing has been very, very successful. It is not just the banks. It is the banks and all the collateral entities, Fannie Mae, Freddie Mac, a lot of the others who have been working together to make sure on the mortgage side as on the other transactional side things will be ready.

    Ms. SCHAKOWSKY. Mr. Chairman, may I ask one other quick question in addition?
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    All this talk about liability for industries, liability protection, in terms of the contingency plans, has there been any thought about protection for consumers whose mortgage payment may not be made, whose ATM transaction may not be recorded, whose check bounces because it wasn't registered, the deposit was made? Are institutions looking at those kinds of protections then for consumers who may be caught up in this trap?

    Ms. SEIDMAN. I think you will actually hear from some institution in the second panel who are doing some of those things. It is interesting when you read the few surveys that there have been of consumers, they tend to split on this issue. Some people want those assurances and some people say, ''Well, if they are giving me those assurances, they must believe it is not going to work.'' So some stuff that seems good can really backfire.

    Ms. SCHAKOWSKY. That was my concern when the industry leaders were asking for liability protection. It scared me. Thank you.

    Chairman LEACH. Thank you very much.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman. Let me follow up on Ms. Schakowsky's questions, because I think they are very appropriate.

    I also welcome my fellow Houstonian, Governor Kelley here. Also, let me say, Governor, I appreciate the initial part of your statement where you talk about trying to prepare the public and not to create a panic. I think that is terribly important. I talked to a friend of mine who has a large Houston retail operation the other day, and he was telling me that their largest selling items are collapsible water tanks and Coleman stoves and things like that, and they were thinking about having a Y2K special, but they didn't want to appear as to be encouraging that type of behavior.
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    But Ms. Schakowsky raises a couple of important questions. One is, from the regulators' standpoint, if there is a problem in the clearinghouse—and you are hoping there is not going to be—or if there is a problem in banks' internal clearing operations and it results in a bounced check or it results in a missed mortgage payment, that then would result in fees to the consumer; or the reverse might be that interest is not paid to a consumer account. Is that covered under any of the existing regulations, whether it is TILA or the Electronic Transfer Act, that charges would be reversed or that interest would be credited? Is there a way to address that under current statutes and regulations?

    Mr. BURKE. No. I will say I don't think there is a way for addressing it under current statutes. It is good business. They do it all the time if there is a mistake made, but I don't think there is a statute that enjoins the bank to return a service charge.

    Mr. BENTSEN. Is it something we ought to be concerned about, that there should be some standard or some supervisory letter from the regulators with respect to problems that occur? And that might also go to the liability question where it might create some protection for banks that the regulators have tried to address this problem.

    Mr. BURKE. My personal reaction to that—and I don't want to take over the panel here—is that the—well, I want to say it this way: that banks will do this because it is good business. Part of their contingency planning, and they do this almost every day—correcting, if you will, problems with their data processing system—so it is not new to them. So I think they have to prepare to do this. And as far as liability goes, I would not be able to speak to that.
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    Mr. HAWKE. I am not aware of anything in the existing regulations that would require institutions to make their customers whole in situations of that sort. As a matter of fact, on the contrary, one of the questions that has come up is whether a Y2K glitch would be a so-called bona fide error that would exculpate the institution itself from liability that it might otherwise have for not observing the strictures of one of those rules.

    Mr. KELLEY. Mr. Bentsen, Mr. Hawke is one of the very best banking lawyers in town, and I am not a lawyer at all, but I am advised by staff that the universal code, universal commercial code, does provide for damages for improperly bounced checks, for instance, which would also include any damages that are done to someone's reputation.

    Mr. BENTSEN. I have two other quick questions. One is, Governor, in your testimony with respect to the planning—and this is true with other regulators, and we talked about the 12 percent of the banks under the OCC that have not met certain standards—going back to the liability question again: One, what ultimately will you do if someone is not meeting the standards that you have set to become Y2K compliant? And this is more of a judgment call on your part, which you may not want to answer: If someone ultimately doesn't meet that standard by the end of the year and there is a problem, do you think that is sufficient cause for action against that bank, having been given the standards, the different phases to meet, through the supervisory opinion of the regulators?

    Mr. HAWKE. Mr. Bentsen, let me say that there are a variety of enforcement tools that the agencies have available, ranging from the relatively informal types of action like a supervisory directive to the formal cease-and-desist order. All of these tools have been used to one degree or another to date in trying to assure compliance with the various FFIEC benchmarks.
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    I think everybody has to understand that this is a dynamic process that involves the continuous monitoring of institutions by the supervisors. As we get to the June 30 date by which institutions are supposed to have completed their testing and implementation of changes, the number of institutions that are in the target zone for possible problems is going to be significantly diminished and highly identifiable. As that population of potential problem institutions is identified and narrowed to what I think is going to be a very small number, the intensity of supervisory scrutiny will increase dramatically. And all of these supervisory tools will be available.

    So I think it is highly unlikely that we will get to the third quarter of the year and find institutions that are totally recalcitrant or totally unprepared to deal with Year 2000 problems. The process really doesn't admit of that happening.

    Mr. BENTSEN. And with the Chairman's indulgence, let me just ask this.

    Governor, in your testimony, you talk about the availability of liquidity, and in particular the ability to borrow from the discount window, the Fed. And as you know, every year, normally every year at the end of the year, we see a spike in the Fed's funds rates as banks move to cover positions, and then it comes back down.

    Would we expect to see an abnormally large spike perhaps this year, and is that something we should be concerned about, that might ripple through the rest of the credit markets because that rate doesn't adjust to other variable rates and things like that? Or is that something we should just take as an extraordinary occurrence that won't have any medium-term effects?
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    Mr. KELLEY. We certainly have thought about that as part of our contingency plan, and I do not believe that should that occur, that it would have any medium-term impact on the economy.

    If I may make one quick correction that probably didn't come to anyone's ear except somebody who happens to be at the Fed, the Fed funds rate, which is the target rate that the Federal Reserve sets, does not spike. The market for Federal funds might spike if it turns out to be in demand, and that is not an infrequent occurrence, just a technical correction, if I may.

    Mr. BENTSEN. A minor one, at that.

    Thank you.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you. There is no doubt that you are one of the better Governors at the Fed, Mr. Kelley.

    Mr. Gonzalez.

    Mr. GONZALEZ. No questions. Thank you, Mr. Chairman.

    Chairman LEACH. The gentlewoman from Ohio.
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    Mrs. JONES. Thank you, Mr. Chairman.

    As I sat here as the last examiner, I thought about when I sat as a judge in court, and I would sit there and the jury would be saying, ''please, no more questions, no more questions.'' But I have to ask just a few, if you don't mind.

    Mr. Hawke, when you spoke about institutions, are you speaking of both regulated institutions in the sense that we have talked about all the regulations for YK 2000, or are you talking about any institution that has prepared in this instance? What I am trying to contemplate—and I think my colleague on the other side of the aisle was contemplating—was, far be it for us to not regulate everything that needs to be regulated, but I mean, there could be some group that you would be in contact with, or business transactions that have not been through the same process.

    Mr. HAWKE. My references were to the banks that we supervise and the providers of services to those banks. The agencies share responsibility for examining servicing organizations, that is, those organizations on which banks rely for, say, data processing services. But our oversight operations don't go beyond that.

    Mrs. JONES. Let me ask this question, again, back to the lawyer, and I am going to get to the rest of the panel within the time that I have.

    My experience in the law would not cause me to want to create any greater tort liability for anyone with regard to Y2K problems. However, I would not want to limit the ability of anyone to make an appropriate claim as a result of that.
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    As you sit today and as we sit today, where do you see we stand with regard to that issue?

    Mr. HAWKE. There is legislation pending that would provide exculpation. I think that has to be given very searching consideration. I think the implications of exculpating institutions from liability are very far-reaching. They raise potential constitutional questions. I know the Justice Department has raised concerns about that. They also raise moral hazard issues.

    Mrs. JONES. And that is kind of the point that I am making; that I am of the position that I don't want to create liability for people, but I don't want to limit their liability either, if in fact that whatever act of omission or commission, they would be responsible.

    I have some other tie-ins here.

    Mr. D'AMOURS. If I may speak for the credit union community, 90 percent of credit union communities are dependent upon vendors for their Y2K compliance. I agree with the comments that Mr. Hawke just made, but added to that when you get to the credit union level is the fact that it may be that such legislation would impede the ability of credit unions to recover against vendors. So it is not necessarily the institution.

    Mrs. JONES. Oh, I didn't mean to limit my statement to just the institution, I am talking about anyone that who, as a result—if, in fact, you have a claim—I don't see that a Y2K problem creates a claim that was not already covered in some fashion, that may be in the law already.
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    Mr. D'AMOURS. I agree with that. I just wanted to point out that it is not only the institution that may be being protected by such legislation, it may be the institution being prevented by some legislation from proceeding with litigation.

    Mrs. JONES. By any new legislation, you are saying?

    Mr. D'AMOURS. By new legislation. Exactly.

    Mrs. JONES. I think we are on the same page. I may just not be speaking clearly.

    Let me lastly make an inquiry. Though all of us in this room talk about computers and know about computers—and I missed the question from my colleague, so I can't say whether or not anyone spoke to this issue—there are millions of people in our country who have never sat at a computer. When you say ''Y2K,'' they say, ''huh?'' And it goes across race, it goes across class, it goes across sex, urban, suburban. How are we going to reach these folks? What are we going to do to talk to them about this issue?

    I think about when the Equal Employment Opportunity Commission first started; you had to post a sign in your office that you were an equal employment opportunity employer, or you had to encourage. What are we doing? How do we deal with that issue?

    Mr. HAWKE. One important part of this whole Y2K remediation process as far as financial institutions are concerned has been an insistence on the part of the agencies that every institution have a customer communication program of its own and that institutions help to educate their customers, not only about the Y2K problem, but about how they are addressing it and how successfully they are addressing it.
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    Mrs. JONES. This was an open question to anyone.

    Mr. D'AMOURS. I would just like to say that I think financial institutions are doing everything that they reasonably could be expected to do to communicate with their customers, or credit unions with their members, about their security; the steps they are taking to become Y2K compliant and the like.

    I think one of the frustrations is that we are going to have to depend—I am not sure I should characterize it as a frustration—but one of the problems is we are going to have to depend on the general media to act as responsible citizens in this democracy and to focus, to present this issue—this goes back to something Congressman LaFalce was getting to—to the average consumer. And really I think hopefully, the general media in our democracy will be responsible and not go looking for scare stories, but report on the positive things that are being done on the safety of financial institutions, on the fact that it is unnecessary to remove funds from a safe, insured financial institution into some—to buy tents or bomb shelters or whatever else people are going to be trying to sell.

    So in large part, it is out of our hands, and I think we have to depend—I wish somebody would call the press and then give them a lecture on their responsibilities in not stoking panic, but in fairly reporting on this situation.

    Mrs. JONES. Mr. Chairman, if you will indulge me just for a moment, please.

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    I am not here to beat up on the media about that issue, and unfortunately, we can't have a dress rehearsal for this particular event. But it seems like collectively there are some additional things that all of us might do. And just as a new Member of this committee, I think we need to—both us in Congress, you in the institution, the media—maybe need to spend a little time walking through this process to think how we can all get to the level where we are providing as much information as we can to every consumer, be it the $1-a-week depositor or the $2-million-a-week depositor.

    Mr. Chairman, I think one last person on the panel wants to say something, but I have no further questions. Yes, Ma'am.

    Ms. SEIDMAN. On Thursday, the OTS and the OCC are going to cosponsor—and Chairman Leach will be our keynote speaker—a summit on Contingency Planning and Customer Awareness in connection with the President's Y2K Council. And the people at that summit will be representatives of about 80 financial trade associations, not just banks, but securities firms and mortgage bankers and others. We will be discussing how best to do exactly what you are talking about. And I hope coming out of that, because of some of the other work that the Y2K council will be doing this summer, we can make very strong inroads in this area.

    Ms. TANOUE. I wanted to add that the general consumer education effort is extremely important. But, bottom line, consumers care about their particular institution and what their particular bank is doing, and that is why we are emphasizing the importance of communications directly by a bank with its customers.

    If I could submit to you: who do you care about? The entire industry or your particular institution?
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    Mrs. JONES. Me personally? I care about my constituents.

    Ms. TANOUE. Thank you.

    Chairman LEACH. Mr. Kanjorski.

    Mr. KANJORSKI. Thank you, Mr. Chairman.

    Going from the macro to the micro, Mr. D'Amours, you have a great deal of faith in the media and I hope that they are as responsible as you indicate they may be.

    I wanted to direct a question to you about the Central Liquidity Facility. It has the statutory authority to borrow up to 12 times of its subscribed stock and surplus. We should say that amounts to $18.5 billion. But through prior action of the Congress in the appropriations process, an additional cap of $600 million was placed on direct loans to credit unions.

    First and foremost, has this cap been adjusted at all for inflation and growth of credit unions?

    Mr. D'AMOURS. Congressman Kanjorski, the cap has never been adjusted for general inflation, nor has it been adjusted for the growth in credit unions, nor has it been adjusted for the growth in the stock and surplus at the Central Liquidity Facility. Moreover, when the cap was first set at $600 million, it is interesting to note that that amount exceeded the stock and surplus of the Central Liquidity Facility at that time. So it is easy to conclude from that that the Congress initially—that was back in 1980—did not intend to set a limit that was below what would today be an $18.5 billion ceiling.
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    Mr. KANJORSKI. As I understand, that cap is remaining in place, though, and that is all it can——

    Mr. D'AMOURS. I didn't hear the question.

    Mr. KANJORSKI. That cap is in effect today under the conditions about which we are talking; the only amount credit unions can borrow from the Central Liquidity Facility is $600 million instead of the $18.5 billion?

    Mr. D'AMOURS. For borrowing to make new loans to credit unions, there is a $600 million limit.

    Mr. KANJORSKI. Do you have any estimate of what the cash withdrawals of credit unions are expected to be in the fourth quarter of 1999?

    Mr. D'AMOURS. Well, it is difficult to estimate, but one figure we use is an average of $500 per family for Y2K-related purposes. There are 15 million families whose primary institution today is a credit union. That would amount to about a $7.5 billion liquidity need.

    Mr. KANJORSKI. Well, if we were to raise or remove the Central Liquidity Facility loan cap, would that have any impact on the Federal budget?

    Mr. D'AMOURS. No. It would have no budgetary or scoring impact.
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    Mr. KANJORSKI. What access do credit unions have to the Federal Reserve discount window?

    Mr. D'AMOURS. Very limited today. Earlier, there was an exchange between Governor Kelley, Congressman Vento, one of the earlier questioners, maybe Chairman Leach, on that question. Only 42 percent of credit unions existing today have share draft accounts, called checking accounts to the general community, so they are not even qualified for membership in the Federal Reserve. Only about 20 credit unions have membership in the Federal Reserve, with some 200, as I understand it, with applications pending. Of course, having an application pending doesn't necessarily mean the application will be approved.

    So today's access of credit unions to the Federal Reserve is very limited. But, as was said earlier, we have been working with Governor Kelley and with others at the Federal Reserve in an attempt to work out something relatively soon that would improve credit union access to the discount window.

    Mr. KANJORSKI. Do you think that the Central Liquidity Facility is in a better position to meet the needs of credit unions than the Federal Reserve? Would that be the simplest way for you?

    Mr. D'AMOURS. As I said in my testimony, Congressman, as I said in my opening statement, I think the easiest, most efficient and best way to solve this problem is by removing an arbitrary cap placed on the Central Liquidity Facility. And in response to a question—you weren't here—I don't want to speak for him, but I just heard Governor Kelley say that he thought that that might be the best solution also.
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    Mr. KANJORSKI. And that would require congressional activity?

    Mr. D'AMOURS. We have already asked the Appropriations Committee to do so. It would be subject to their initial action, and then approval by Congress. It could be done quickly. People say it can't be done quickly enough. I don't know why it can't be done quickly enough. I have seen the Congress move very quickly when the circumstances required such action.

    Mr. KANJORSKI. So, it is your belief as the regulator of credit unions that the corporate credit union system could handle all the corporate concerns related to Y2K?

    Mr. D'AMOURS. Not only do I believe that, I think that is the best solution that we could achieve.

    Mr. KANJORSKI. I have today written a letter to the Secretary of the Treasury, asking him to come together with the various regulators and the Executive Branch to help in addressing this problem. But certainly I think it is important from your testimony that this committee and the Congress take action to raise this cap.

    Mr. D'AMOURS. I appreciate that, Congressman.

    Mr. KANJORSKI. Thank you.

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    Chairman LEACH. I think all the panelists have asked questions.

    I would like to raise a couple of additional ones on the issue just raised by Mr. Kanjorski. Let me just say that as Chairman of the committee, I have been working with the credit union movement and the Fed to try to insist that greater flexibility be placed in Fed policies. In addition, it is my view, despite Treasury opposition, that we might have to be more flexible with the CLF, and this is something that we are going to be reviewing in the weeks ahead.

    Having said that, let me go to a couple of issues.

    First let me say none of us has any idea if the Y2K issue is the most over-exaggerated issue in modern-day economic history, or if it will become the most understated. One of the things that Members of this committee and all of you as regulators have in common is a belief that one has to look at worst-case scenarios and to assume the end of the world in order to be prepared, so that in essence, this is a blip on the horizon of economic thought. And it is my own hope that at the end of the day, a year from now, people will be saying, ''Y2K, it really was—why so much?'' But having said that, until that becomes a real prospect, we have to assume the worst.

    Now here there are some differentiations among regulators. It is my sense that the Comptroller's Office was taking a tighter approach as to how it was looking at some of the issues, and has a little lower percentage of people compliant with the tougher standard, and that the Comptroller's Office is suggesting that some of the larger banks at the moment are not doing as well as they might. Would you care to comment on that, Mr. Hawke?
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    Mr. HAWKE. Mr. Chairman, I think the caveats that you expressed are certainly well taken; but again, I want to repeat the statement that I made before. I think the banking industry is going to come through this Y2K challenge with flying colors, and I think it is going to do so in large part because of the intensity of the supervisory process.

    The ratings process at the OCC is a dynamic process that keeps up-to-date on a real-time basis with changes in the banks' compliance with the various benchmark dates that have been set by the FFIEC. We think that the large banks have been doing an exceedingly good job. They have thousands of systems to repair and test. The most common problem that the large banks are finding relates to the Leap Year date in February of the Year 2000. When they have discovered problems, they have been able to fix them very quickly, and we expect that all large national banks are going to be in compliance with the June 30th FFIEC target date and have their systems ready for the Year 2000. This is an ongoing process, with a tremendous amount of continuing scrutiny.

    Chairman LEACH. Well, let me say, as has been partly referred to earlier, Y2K is an issue of confidence, and nothing rests more at the heart of the banking system than confidence. In this regard, confidence is often a liquidity problem. The Federal Reserve in modern times has dealt with liquidity in very sophisticated ways. But this is an old-fashioned, not new-fashioned liquidity problem in that it could well be a consumer cash issue. And cash problems are not only the ability for a banking system, for example, to print enough money, but their delivery problems.

    So one of the questions is, are there enough trucks, are there enough airplanes to distribute cash in the event that the percentage of cash demanded by the public—which is the consumer in this case—is quite large? And if there aren't enough trucks, are there a number of alternative delivery systems, whether they be National Guard apparatuses, and is the Federal Reserve looking at that kind of a backup system?
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    Mr. KELLEY. Yes, sir, we are indeed, and have been for some time. You are quite right, it is a key challenge to make sure to the best of our ability, to make sure that cash is where it needs to be when it is demanded by the consumer. There will be plenty in Federal Reserve vaults, and it is the transmission from there forward to the consumer that is the challenge. There is a finite capacity of armored cars. We are working with that industry at the Fed and through the banks to maximize the use of that capacity in various scheduling ways.

    We are looking at other possibilities of enhancing our capacity to get money in the hands of banks, and I know that many individual banks are in turn examining their distribution systems, starting with the need to put in an additional supply of cash well ahead of time in their own vaults, so that they will be ready, and then providing for such last-minute distribution challenges as may evolve.

    This is an ongoing piece of work; it is not completed, and I am sure that it will take shape more firmly as the year goes along and we get some better sense of what the cash demands are liable to be. But we are not expecting that there will be an excessive demand, but we are endeavoring to prepare ourselves for virtually any level of demand should that evolve.

    Chairman LEACH. Well, thank you very much.

    I have no further questions.

    Mr. BENTSEN. Will the Chairman yield?

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    Chairman LEACH. Yes, of course.

    Mr. BENTSEN. Governor, when your colleagues testified before to this committee on this issue, some have asked whether or not the Fed would have any intention of raising the reserve requirement of banks; and I believe, if I am correct, that the Chairman and others have said that is not the intention. Is that still the case, or is that something that is being explored?

    Mr. KELLEY. No, sir. You have it exactly correct. There is no intention to do that in the Y2K context and no discussions going forward about that sort of thing.

    Mr. BENTSEN. Thank you.

    Thank you, Mr. Chairman.

    Chairman LEACH. Well, thank you. I want to thank all of our panelists. We appreciate your assistance.

    I would like to ask the second panel to come forward.

    The witnesses on our second panel will cover a number of issues, including best practices among institutions for addressing customer concerns about the Y2K problem. We are honored to have with us A. Scott Anderson, who is President and CEO of Zions First National Bank in Utah, who will be representing the views of the American Bankers Association on Y2K liability legislation.
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    We have four individuals who will discuss best practices at banks and credit unions for dealing with customers, and I would like to turn for our first introduction to Congressman Gonzalez.

    Mr. GONZALEZ. Mr. Chairman, I am assuming, then, that Louis Barton will be the first witness, and I thank you very much, and we will keep it obviously very brief. But it is a great pleasure for me to welcome and introduce to the committee here Louis Barton who is a representative of Frost Bank, which is based in my district, San Antonio.

    I will quickly tell you this is a very proud, wonderful bank, a great corporate citizen involved in all aspects of community activities, and of course has a stellar reputation. So it comes as no surprise that we have a representative from that bank that will be here to share their experience in how they have prepared, because this is what is expected of Frost Bank and they have been delivering in our area for over 130 years.

    Thank you very much, Mr. Chairman.

    Chairman LEACH. Thank you. We welcome Mr. Barton and thank you for that thoughtful introduction.

    Our second banker will be Mr. Patrick Redmond of Viking Community Bank in Seattle, who, Mr. Metcalf informs me, is a fine banker and a wonderful bank; and then Mr. James Guretzky who is President and CEO of the SAC Federal Credit Union in Omaha, and we welcome you, Mr. Guretzky. And finally, Mr. Ralph Reardon of the Coastal Federal Credit Union in Raleigh, North Carolina. Mr. Reardon will also be representing the Credit Union National Association; Mr. Guretzky, the National Association of Federal Credit Unions.
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    Finally, we are pleased to have Diane Casey, who is Managing Partner with the accounting firm of Grant Thorton LLP, to give us a private sector assessment of bank readiness for the Year 2000.

    Mrs. JONES. Mr. Chairman, seeing how we are allowed—I just learned that Ms. Casey is the daughter of a woman that used to work in the Court of Common Pleas with me. I know nothing about her institution, but I know a lot about the family, so I thought I ought to be able to register that for the record.

    Chairman LEACH. We have asked Mrs. Casey to bring along any scuttlebutt she might have about Members of the committee, and those observations will be relevant as well.

    Mrs. JONES. Thank you, Mr. Chairman. It won't be much.

    Chairman LEACH. Welcome, Mrs. Casey.

    At this time I would also like to ask unanimous consent to enter into the record the prepared statement from America's Community Bankers. Without objection, that is so ordered.

    Chairman LEACH. We will turn to Mr. Anderson, and let me say, without objection, all of your statements will be presented in the record in their full form and you are free to proceed as you see fit.
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    Mr. Anderson, we will begin with you.


    Mr. ANDERSON. Thank you, Mr. Chairman. I am Scott Anderson, President and Chief Executive Officer of Zions First National Bank in Salt Lake City, Utah. Today I am testifying on behalf of the American Bankers Association.

    I want to leave you with three important messages this morning about the American banking industry in the Year 2000. First, American banks are taking Y2K very seriously. Since 1995, the banking industry has devoted millions of staff hours and billions of dollars to correcting the Y2K problem. We recognized early-on that Y2K is much more than a systems problem. Y2K reaches into every part of the bank. Every product and service is affected; every employee and customer must be knowledgeable about Y2K.

    We also recognized early-on that Y2K is not just an internal operations issue. A bank is dependent upon its vendors, service providers, data partners, customers, both here and abroad. American banks have addressed each of these issues in preparing for Y2K.

    The argument that the liability legislation will somehow undermine the incentive American companies have to deal with the Y2K problem simply does not hold true upon closer analysis. Companies across America are fixing Y2K problems for one simple business reason: We want to survive. We want to compete in the next millennium. We want to be successful.
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    If we don't address this century issue change competently, American businesses, large and small, would immediately begin to lose customers and revenue. We do not need the threat of litigation as a motivating factor. Litigation is only a distraction from fixing the Y2K problems at hand.

    My second point is that the American banking industry will be prepared for the century change. Let me repeat that. We will be prepared for the century change. We know we will be prepared because of the extensive planning and testing we have done and are doing of our systems. Many banks are testing systems now by turning forward the computer clock to January 2000 and other dates and writing test programs to verify remediation. Our internal and external auditors, as you have heard, have vigilantly overseen our progress and reported that progress for our senior management and boards of directors.

    Meanwhile, our regulators have conducted detailed and repeated on-site examination of our Y2K programs. Our regulators have worked in close partnership with banks across the country to assess each bank's response to the Y2K problem and to ensure that we are on track to a timely completion.

    To put it another way, the money of the American people will be safe in American banks. And to paraphrase what you said earlier in your opening remarks, Mr. Chairman, there is no safer place for money than in a bank. And to quote the FDIC, ''Money is safe in an FDIC insured account, no ifs, ands, or buts about it.''

    My third message is that the banking industry, along with the rest of the American banking community, urges Congress to address broader Y2K liability issues this year. The Good Samaritan legislation enacted last year was helpful in promoting an environment of open disclosure and discussion of Y2K-related information. But now we must address the potential tidal wave of litigation which could engulf the American judicial system, the American economy, and American businesses after the century date change.
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    Now, you may be asking yourselves, if the banking industry has spent so much time and money to prepare for Y2K and if our regulators have said that we are ready and ahead of other business sectors in terms of Y2K readiness, why are banks so concerned about litigation? First, we believe that it is sound policy to remediate, not litigate. Even after the century change, most companies, including banks, will fix any Y2K problems that occur, rather than litigate them with customers and suppliers. That is why we urge a no surprises, pre-litigation opportunity to remediate before lawsuits are filed. That is also why alternate dispute resolution is so important to the business community and should have a place in any proposed legislation.

    Second, we believe that the vast sums in litigation costs estimated to arrive from Y2K disruptions, both real and imagined, will be much better spent invested in our economy at the start of the new century. Litigation, especially class action litigation, with the potential of unfettered punitive damages, is easy to begin, but very costly to resolve. Because banks have millions of customers and because we serve as financial intermediaries in millions of transactions every day, we are especially vulnerable to this type of deep-pocket litigation. If Congress believes that we have made reasonable efforts to address this ''once in a millennium'' problem, you should consider appropriate legislation which recognizes, rather than punishes, our diligence.

    In conclusion, Mr. Chairman, we feel confident that the American banking system will be safe during the century change. The American banking industry has made an unprecedented investment to prepare for this unique event in history. Nevertheless, we urge Congress to take action to prevent the derailing of this massive Y2K remediation effort into a litigation morass of unprecedented scope and cost to all of us.
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    Thank you for the opportunity to address this committee, and I will be pleased to respond to any questions.

    Chairman LEACH. Well, thank you very much, Mr. Anderson.

    Mr. Barton.


    Mr. BARTON. Yes, Mr. Chairman, thank you very much, and Members of the committee. My name is Louis Barton. I am the bank's Program Director for Year 2000. Today I am testifying on behalf of Frost National Bank based in San Antonio, Texas. We serve the Texas market and have been in business for more than 130 years.

    I am pleased to appear before the committee on behalf of the banking industry to discuss some of the confidence-building measures we are taking to ensure prudent and proactive communication to our customers regarding our Year 2000 preparedness. I will give specific examples of our efforts by Frost Bank to communicate with consumers and business customers about our bank's Y2K efforts and accomplishments.

    Without sufficient information, the general public could draw the wrong conclusions based upon the alarmist rhetoric being promoted by fearmongers and media reporting of these extreme views. Beginning as early as 1996, we saw this as a serious problem and began to deal with it. Our bank went public with proactive customer communications on the Y2K challenge beginning in January of 1997, with several public sessions.
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    In March of 1997 we began soliciting public opinion regarding Year 2000 issues through our Executive Foreign Business Survey. When the responses indicated a low level of awareness, we increased customer education, speaking engagements for trade associations, business groups and community outreach.

    In November of 1997, Frost Bank sponsored a city-wide forum bringing in Y2K awareness expert Peter de Jager as speaker. Our CEO, Dick Evans, opened up the meeting and outlined our commitment to this project.

    In the fourth quarter of 1997, the bank produced a video and brochure that was available to the customers and to the public.

    In early 1998, we were one of the first banks to address potential cash concerns relating to Year 2000. This realization focused our efforts to develop a number of initiatives to reinforce confidence. We are mitigating concerns that might drive requests for unusual cash withdrawals by building on our proactive customer communications program. A reassuring update is included as part of our ongoing proactive telephone contact effort. Also the bank-sponsored citywide time and temperature line includes a series of positive Y2K messages. Our Year 2000 information line was set up for bank customers in February of 1998. The dedicated line provides for up-to-date information for our customers.

    The bank was the first business in San Antonio to meet with the editorial board of the local newspaper to discuss Y2K. This resulted in several strong articles on Year 2000 and expanded public awareness. Frost Bank taught several classes on Year 2000 risk management at the bank administration's institute school at Vanderbilt University and the University of Wisconsin.
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    We traveled throughout Texas to conduct seminars and lead workshops for other financial institutions and their customers. We provided positive status reports at a televised city council meeting and our Y2K experts have been interviewed extensively in the media. Regarding contingency planning, our bank has reviewed specific instances where Y2K could impact a banking service and assess the likelihood of that risk. Specific contingency plans are continually being updated and validated to address situations where risk has been determined as unacceptable.

    In 1998, Frost was instrumental in the formation of the Greater San Antonio Y2K Coalition. Members include city and county government, the power, water, and telecommunications providers, as well as representatives from health care, finance, and food distribution. The coalition meets twice monthly and has pooled individual efforts to assure the public that basic community services will continue. Because the coalition's success in San Antonio has been so good, Frost has been asked to assist in development of other Y2K coalitions in Austin and Corpus Christi. We also retained a communications specialist to educate customer-contact employees on confidence building strategies and the handling of difficult Y2K questions.

    Finally, the Wall Street investment firm of SalomonSmithBarney gave us a vote of confidence and had this to say: ''We believe that Cullen/Frost continues to be one of the banks best prepared to handle the Y2K issue.''

    In October Cullen/Frost was recognized as one of the leaders in Year 2000 readiness by the Independent Bankers Association of Texas. While it is indeed rewarding to receive such recognition, we are most proud of how our employees have responded to this challenge. The banking industry welcomes the helpful and thoughtful oversight that this committee has provided in this area that is of vital interest to consumers and our business community. Thank you for the opportunity to express our views. Thank you, and I will be happy to entertain any questions.
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    Chairman LEACH. Thank you, Mr. Burton.

    Mr. Redmond.


    Mr. REDMOND. I am Pat Redmond, I am the President and CEO of Viking community Bank in Ballard, Washington. I would like to thank the Chairman and Ranking Member LaFalce for inviting us to testify before the committee today.

    There are three key points we are trying to make in our Year 2000 customer communication strategy. The first one is you can count on us; the second one is be prepared; and the third one, believe in the people that you trust.

    Let me get specific: ''You can count on us.'' At Viking Community Bank, and at community banks all over the country, we know the value of personal relationships, and we understand the power of understanding our customers' needs. We know the importance of opening our branches when there are storms or natural disasters, and you have seen the commitment of our people to getting our banks open. You should expect the same with Y2K.

    ''Be prepared.'' Like many of you, I first learned this as a Boy Scout. A little planning goes a long way in making for a successful camp-out. Has anyone here ever forgotten an extra set of dry clothes? I think maybe you know what I mean. The goal of our customer communication strategy is the same: Be informed, believe in the people that you trust, make appropriate judgments, and move forward confidently. In short, be prepared.
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    Viking Community Bank is prepared. We have been working on Y2K issues for two years. Now our focus is on customer communication and practice. Much like our local Ballard Beaver basketball team practices for its big games, we will practice against a variety of scenarios so we can perform effectively for our customers in the Year 2000 and beyond.

    If there are disruptions, our team will know how to react because we have thought ahead and we have trained and because we know our customers. Most importantly, because we will use good judgment. There is no substitute for good judgment in this process.

    ''Believe in the people that you trust.'' At Viking Community Bank, we have routinely communicated with all of our customers and stockholders by way of statement stuffers, direct mailings, lobby displays, face-to-face contact. We have hosted Chamber of Commerce functions and sponsored a customer seminar on Y2K. For the balance of this year, we have a comprehensive schedule to ensure that we deliver our Y2K messages effectively.

    Last month, we introduced the Social Security direct deposit guarantee to comfort senior citizens and the disabled. We call this program a ''loan from a friend.'' We think these types of programs are great because they build customer confidence.

    In May, we will introduce our next program that we will be offering: Reduced rates on our SBA loans to help our small business customers renovate their systems and replenish potential cash-flow problems from Y2K issues.

    But our biggest concern is the irresponsible advice regarding where your cash should be on January 1 of the Year 2000. Let me say unequivocally that the safest place for your cash on January 1 of the Year 2000 is the same place that it is today. It is in your bank. We think a safer strategy is to reduce your dependence on cash during this time by planning ahead. As an added measure of safety we will be offering free travelers checks to our customers during this time.
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    Finally, let me tell you a story that took place recently with one of our customers, Mr. Nicholas Evasco. Nick lives nearby with his wife of 63 years, Alice. Nick says he is basing a lot of their Y2K preparations on his knowledge of backpacking, like bringing enough food, warm clothing, a flashlight and extra batteries. He thinks his two fireplaces will help keep them warm if there is a power outage.

    Early in our conversation, it was apparent that Nick had faith in us and he trusted our bank; but he was gathering information to make his own informed decision. Nick has several CDs in our bank, and one was coming due. Nick decided to renew it, but for a shorter period so that it would mature before the end of the year.

    We were concerned that he might have unsafe plans for the money, so we asked him about it. Nick told us that he had determined that he would roll this amount of money into his checking account so he would have ready access to it should he or Alice need it. Nick told us that once the coast was clear, he would resume his investment strategy.

    Nicholas Evasco did exactly what we want to convey. He talked to the people that he trusted, Alice and his bank, and based upon the information that he gathered, he made a safe plan that is unique to his situation.

    In conclusion, let me say to the American public that the safest place in the world for their money is in their bank. Talk to your banker. You will see that we are prepared, that we are confident, and that you can count on us. If you don't get this comfort from your bank, change banks. But do not move your money to an unsafe place.
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    At Viking Community Bank and at banks all over the country, you will see dedicated bankers doing all that they can to make the promise of a bright future a reality for our customers.

    Thank you for the opportunity to testify before the committee.

    Chairman LEACH. Thank you very much, Mr. Redmond.

    Mr. Guretzky.


    Mr. GURETZKY. Mr. Chairman and Members of the committee, my name is Jim Guretzky. I am the President and CEO of SAC Federal Credit Union, a $175 million, 40,000 member credit union, located in Omaha, Nebraska. I also have the honor of serving as the Chairman of the National Association of Federal Credit Unions Board of Directors, on whose behalf I am testifying today. We appreciate this opportunity to participate in this hearing.

    SAC Federal Credit Union began preparing for Y2K by forming a Y2K task force in mid-1997. This task force is composed of key personnel from each department of the credit union. Since that time, we have met weekly to complete the awareness, assessment, renovation, testing and implementation of all of our systems. This Y2K readiness report, constantly updated, guides our efforts.
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    Liquidity and cash needs are an important concern for the credit union. Securities investments should provide the credit union with $20 million at the end of this year to meet liquidity needs. We have also established lines of credit with Nebraska Corporate Central Federal Credit Union and the Federal Reserve Bank of Kansas City. To address our cash availability toward the end of 1999, we have increased our bond to provide insurance for increasing our vault cash and ATM limits.

    Approximately 75 percent of our members are active duty or retired Air Force personnel or other Federal workers or retirees who have recurring direct deposit of Federal Government payments. Timely receipt and prompt crediting of these payments is critical for the financial and mental well-being of these members. With that in mind, we are currently working on a plan similar to a plan we had in 1996 with the threatened Government shutdown to guarantee the posting of Government direct deposits to members' accounts in January 2000, regardless of receipt by the credit union.

    Educating our members regarding Y2K is an important step in preparing the credit union and our members for any possible problems. By informing the staff of potential Y2K problems and providing them with solutions, we are working to keep our members' concerns to a minimum. In short, I believe SAC Federal Credit Union is ready for Y2K.

    NAFCU has also proven its abilities to lead in this time of uncertainty. Because of the lack of information available dealing specifically with consumer attitudes toward Y2K and how it might affect consumer conduct as it relates to financial institutions in January and their own financial institution in particular, NAFCU commissioned a national survey of 1,000 randomly selected consumers. The poll's purpose was to establish timely benchmarks and gauge consumer attitudes toward Y2K.
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    Mr. Chairman, with your permission, I would like to submit a copy of these survey results for inclusion in the hearing record.

    Chairman LEACH. Without objection, it will be placed in the record. Furthermore, we appreciate your doing the survey.

    Mr. GURETZKY. Thank you.

    NAFCU's survey revealed that there is, in fact, a high general awareness by the public of potential Y2K computer problems. 72 percent of all consumers, including 72 percent of all credit union members, are not worried about problems occurring with their financial institution accounts.

    However, 23 percent of consumers are already concerned enough about potential Y2K problems to consider removing money from their accounts before the end of 1999 as a precautionary measure.

    Credit union members believe potential Y2K computer problems will be fixed before any occur. NAFCU believes that the degree to which this opinion holds firm over time will be determined by a mixture of factors, including any Y2K mishaps before the Year 2000, media coverage, and reassuring communications from their financial institution.

    Just analyzing data from among the people who say credit unions are their primary financial institution, credit union member confidence is particularly high. Eighty-nine percent are confident in their local credit union's ability to prevent Y2K problems, and only 10 percent expressed little or no confidence. More than seven in ten, or 72 percent, of the people who choose credit unions as their primary financial institution, say their perception is that their money would be safer in a credit union than in a bank in the event of Y2K problems.
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    NAFCU is committed to working with Congress, Federal regulatory agencies and credit unions to tackle the risks associated with the coming millennium date change, while protecting credit unions and the well-being of the Nation's over 70 million credit union members.

    Mr. Chairman, I sincerely appreciate this opportunity to appear before this committee and would be happy to answer any questions. Thank you.

    Chairman LEACH. Thank you, Mr. Guretzky.

    Mr. Reardon.


    Mr. REARDON. Thank you. Good morning, Mr. Chairman.

    Chairman LEACH. If you could pull it a little closer.

    Mr. REARDON. Thank you. Good morning, Chairman Leach, Ranking Member LaFalce and Members of the committee. I am Ralph Reardon, Senior Vice President and Chief Financial Officer for Coastal Federal Credit Union, headquartered in Raleigh, North Carolina. Coastal has 85,000 members and assets of $780 million. I am testifying today on behalf of the Credit Union National Association, which represents 90 percent of America's more than 11,000 State- and federally-chartered credit unions with a membership of 76 million financial consumers.
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    I am honored to appear before this committee today to outline the good faith efforts that credit unions are making to comply with regulatory requirements regarding Y2K and the steps we are taking to ensure that our members' financial service needs will be met as we move into a new millennium.

    It is especially important for Congress to know about two aspects of the Y2K preparedness efforts being undertaken by credit unions. The first relates to specific system testing and preparation, that is, making sure that systems we have in place really work. The second equally important element is making sure that our members, your constituents, have the best financial service information available so they have faith in their credit union and their financial well-being.

    You have asked CUNA to respond to seven questions regarding Y2K preparation. The answers are given in the written testimony, and, with your indulgence, Mr. Chairman, I would like to take this opportunity to highlight a few key points about the credit union system readiness.

    One of my responsibilities as chief financial officer at Coastal Federal is the oversight of the Y2K compliance program which we began in early 1996. I am pleased to report that all of Coastal Federal Credit Union's internal mission-critical systems have been Y2K compliant since mid-October 1998, and we have for some time since that period been operating in a Y2K compliant environment. We have expended considerable resources in making this a top priority, but I believe our efforts are consistent with those of what many other credit unions in the industry are doing.
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    Throughout our planning effort, we kept in mind one simple goal—to ensure that our members' normal access to their financial information, their funds, and other credit union services is not disrupted.

    For example, in 1997 we purchased and installed our own power supply, a central generator for our corporate headquarters, which will allow uninterrupted processing of checks, share drafts, ATM, credit card, and electronic transactions, such as direct deposit payments, if a short-term commercial power failure occurs. It is important to know that 85 percent of our credit unions' transactions are electronic in nature. In the case of credit cards, should our credit card processing system fail, we have made arrangements for VISA and Honor Networks to make authorization. If the national check clearing systems are disabled, our members have a backup check or checking card instead of a paper check.

    While the systems that provide financial services to our members are being tested and retested for Y2K readiness and are passing with flying colors, credit unions will still have a problem if adequate liquidity were not available. CUNA believes that access to liquidity must be a focal point of any Y2K preparedness efforts. CUNA has been working with the NCUA, the Federal Reserve, and Treasury to allow for expanded use of NCUA's Central Liquidity Facility as Congress intended to obtain liquidity to fund members' extraordinary Y2K withdrawals.

    Successful liquidity planning hinges on member confidence regarding access to financial services and to reliable financial service information. To keep our members fully informed of Y2K initiatives and to minimize anxiety, we have undertaken a comprehensive member education campaign.
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    My credit union is not alone in that effort. Recently Navy Federal Credit Union has taken the extraordinary step of promising to post an amount equal to a member's last Government paycheck if there is a problem that delays the Government's delivery of such items. You may have seen coverage of this in the Washington press in recent weeks. That is just one example of how credit unions are going the extra mile for members.

    As the trade association, CUNA's role is to encourage, facilitate, and spotlight credit unions' millennium-readiness efforts. In this connection, CUNA created a Y2K subcommittee on which I serve which focuses on credit unions' Y2K preparations and, in turn, disseminates information through the credit union movement. The task force recently developed principles regarding Y2K liability legislation and is in the process of communicating our interest to the House Judiciary Committee, the House leadership, as well as to this committee.

    Another important facet of CUNA's enterprises has been a series of Y2K satellite broadcasts between senior staff and experts in Y2K preparation. CUNA has also developed a Y2K compliance checklist and numerous other materials for credit unions, including statement stuffers.

    The corporate credit union network has also made a concerted effort to ensure Y2K readiness. As providers of liquidity and payment services, their preparedness is a critical component of readiness within the system. Corporates, including U.S. Central, are devoting an impressive amount of time and effort to ensure they are ready. Credit unions have worked long and hard to develop too much trust on the part of our members to allow the Y2K bug to bite us.
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    I am not suggesting that CUNA or my credit union has all of the answers, but I am here to tell each of you that we are very serious, very genuine, about doing everything possible that credit unions are ready for the Year 2000. I am also here to tell the committee that, based upon my conversations with Federal credit union volunteers and professionals, America's credit unions would be making these preparations regardless of any Government mandate to do such. To credit unions, taking care of our members is not only good business, it is our only business of people helping people. Member service defines our existence, and the Y2K situation just gives us one more opportunity to demonstrate that to the people who we serve and to you who in turn serve us.

    I applaud the committee for this review and welcome the opportunity for CUNA to provide more information to you as you request. Thank you for allowing us to present our comments. We are open for questions. Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Reardon.

    Ms. Casey.


    Ms. CASEY. Thank you, Mr. Chairman.

    Mr. Chairman, Members of the committee, I am Diane Casey. I am the Managing Partner of Financial Services for Grant Thornton. Grant Thornton is a major accounting and management consulting firm that provides a broad range of professional services to organizations around the world, including over 500 banks, savings and loans, and credit unions.
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    I appreciate the opportunity to share with you today the results of Grant Thornton's annual survey of community bank executives as it relates to community banks' Year 2000 readiness.

    Now in its sixth year, our survey is the oldest continuous independent study of community banks in the financial services industry. The profile of the 815 banks that responded to our survey this year closely matches the profile of all community banks, including primary Federal regulator and ownership structure. The survey includes both banks and savings associations.

    Last year, our survey revealed that a large majority of community banks had identified the Year 2000 as both a technology and a management issue, but only a third had begun to develop contingency plans, and their Y2K budgets were significantly lacking. Bankers respond voluntarily to our survey and have revealed that substantial progress in their Y2K preparations has been made over the past year.

    According to this year's study, virtually all community banks report that they will complete and implement the FFIEC guidelines for the testing of all mission-critical systems by June 30, 1999. With respect to the FFIEC milestone date of December 31, 1998, which dealt with the completion of testing of internal mission-critical issues, 64 percent of the banks told us that they would meet this date. Another 28 percent said they would be complete with this testing by the end of the first quarter of 1999. This means that the vast majority of community banks, 92 percent, said that the testing of internal mission-critical systems would be totally complete by the end of the first quarter.
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    Other surveys have indicated similar findings regarding the testing of internal mission-critical systems, but have concluded that this is a problem. We believe that to determine if a problem truly exists, data must be considered in the context of all of the findings.

    Since almost all community banks said they would be complete with testing of internal mission-critical systems by the end of the first quarter and the vast majority of the banks also said that they would be complete with the FFIEC milestone that truly counts, June 30, 1999, for the testing of all mission-critical systems, we concluded that this is a very positive finding.

    Community banks have expressed a high degree of confidence in their own ability, their correspondents, and their service bureaus to be ready for the new millennium, yet only about 54 percent are confident in the ability of other suppliers to be ready, and 43 percent are confident that public utilities will be ready. An area of concern is the lack of confidence that the 64 percent of the community banks said that they had in the ability of their customers to be Y2K ready.

    Community banks have undertaken significant outreach to educate their customers with guidance and borrower worksheets from the agencies and other organizations. Yet the conservative nature of most bankers causes them to take a cautious approach when it comes to assessing the impact of Y2K and would account for the lower confidence level.

    Confidence also appears to correlate with control and information. Banks know what they and their correspondents have been doing to prepare for the Y2K, but they have less information from organizations outside of their control such as their suppliers, the public utilities, and even their customers; and therefore, have less confidence in them.
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    Our study also showed that 90 percent of community banks now have board-approved contingency plans. This is nearly three times the percentage of banks that had such plans in November of 1997, confirming the effectiveness of the agency guidance that was released last year. As part of their contingency planning, we found, on average, community banks are planning today to hold an additional 14 percent more cash in their branches for the century date change. We also found that over a quarter plan to have more than 20 percent more cash in their branches for the century date change.

    Community banks' level of investment in Y2K solutions has also increased significantly. Last year we found that they were spending an average $7,000 in 1997 and were planning on budgeting just $23,000 for Year 2000 solutions in 1998. Based on our survey last year, we suspected that community banks had underestimated what they would actually spend. This year's survey proved that suspician to be true.

    Community banks, on average, actually spent on average more than $62,000 in 1998, two-and-a-half times greater than their estimate. For 1999, they are predicting they will spend a more realistic $50,000. If this spending holds true, then for the past three years, community banks will have spent on average close to $120,000 on their Year 2000 expenditures, a significant investment based on their technology budgets and their size.

    In conclusion, our study indicates that community banks are making solid progress in their Year 2000 readiness. We find this to be true for all community banks, regardless of size, ownership structure, or regulator. The guidance the agencies have released over the past three years has been extremely helpful. However, when dealing with technology related issues, flexibility is essential.
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    For the interim milestone dates, it is more important for the banks to fully complete the testing and/or the remediation and to be prepared to meet the final deadline. For many community banks, as well as other entities, they cannot control all the variables of this immense issue. The biggest Year 2000 challenge most community banks face is not their ability to meet the technology issue, but rather their ability to deal with the fallout from the doomsayers that focus on the failures or problems, real or perceived.

    The Grant Thornton study confirms what the agencies have already found during their examinations, that community banks are taking the right steps to be Year 2000 ready.

    Thank you. I would be pleased to answer any questions.

    Chairman LEACH. Thank you, Ms. Casey.

    First, let me say I am very impressed with all the testimony. You believe, in a great sense, that your individual institutions are in good hands. In fact, you are well named.

    Mr. Redmond's bank is the Viking Community Bank, and the Year 2000 presents an interesting set of analogies, because it is the one-thousandth year since the Vikings came to America and the one-thousandth year actually since Christianity was introduced to Scandinavia, and it is my understanding that the new stones that were just discovered indicate that the last words are, ''put your coins in the Viking Community Bank.''

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    Mr. REDMOND. I think that is accurate, Mr. Chairman.

    Chairman LEACH. I am not sure, but that is the rumor. As I look at Mr. Anderson, who has a Viking name and represents one of America's truly distinguished and thoughtful banks, I am obligated to ask a little different question. On your bank, you are unique in that you own one-third of a Government-sponsored enterprise, FarmerMac. I would like to ask, because I understand that about 30 times the capital of FarmerMac is invested in arbitrage instruments. Does this pose Y2K problems, or is it a hedge against Y2K problems?

    Mr. ANDERSON. Well, currently it is a hedging issue, an investment issue. The goal is to go out and generate long-term agriculture loans for our farmers across the Nation and sell them to FarmerMac.

    Chairman LEACH. But in the short-term it is kind of a profit circumstance?

    Mr. ANDERSON. Right.

    Chairman LEACH. A kind of Government entitlement, is that right? There are no Y2K problems associated?

    Mr. ANDERSON. They are remediating their computers and systems just like the banks will, so they will continue to service their customers.

    Chairman LEACH. Fair enough.
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    It is my understanding Mr. Guretzky and Mr. Reardon are here partly to say that you think the most efficient way to deal with credit union liquidity problems might be through the CLF, although there might be some potential through the Fed, is that correct?

    Mr. GURETZKY. As Mr. Reardon testified—and NAFCU also concurs with that testimony, we believe the best solution to any potential liquidity problems for credit unions is through raising the CLF cap, which is before the Appropriations Committee at this point in time. I believe they have asked for a buyoff from this committee also.

    Chairman LEACH. Ms. Casey, your testimony is very interesting, because you have come from an independent perspective as a reviewer of the banking industry and what your—the brunt of it, as I understand it, is that community banks have put an awful lot of money into becoming Y2K compliant, more than they even suspected they would have to, and that they are meeting standards very credibly at this point, is that valid?

    Ms. CASEY. Yes. That is what we have found. Community banks are definitely on track and are meeting the agency milestones that have been established.

    Chairman LEACH. Have you looked at the larger banks?

    Ms. CASEY. This study focuses exclusively on community banks and savings institutions.

    Chairman LEACH. I thank you all.
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    Mr. Sandlin.

    Mr. SANDLIN. Thank you, Mr. Chairman. I just had one question of Mr. Anderson.

    I noticed in your testimony you mentioned that you noted there were some Federal consumer protection laws that would limit a financial institution's civil liability due to bona fide errors and that you needed some sort of clarification by Congress in order to use the bona fide error provisions as a defense to frivolous or abusive litigation.

    Could you comment a little further on that?

    Mr. ANDERSON. Sure. Our view, and what we are seeking as we look at these various bills, is to focus on remediation, fixing the Y2K problem, rather than on litigation. As we have looked at the bills, we are not—I don't believe there is any portion of them that limit claims that can be made going forward. But what it gives us is a 90-day-fixed period during which institutions, whether they be banks or businesses or whatever, can go in and remediate and fix the problems.

    I think, if you talk to most consumers or small businesses, that is what they really wanted. They want the problem fixed.

    We, as a bank, have outside vendors supplying us with various software programs and hardware systems; and if something went wrong with them after Y2K, we would rather have their attention focused on how can we get it fixed and up and running as quickly as we can, rather than entering into a suit.
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    Mr. SANDLIN. Would a bona fide disputed error give you more of an opportunity to resolve a dispute through an opportunity to cure, rather than a new legal defense to the allegations made?

    Mr. ANDERSON. Absolutely. Our business—as the Chairman has said, is based on trust; and it is imperative we maintain that trust with our customers, so if a mistake is made, a bona fide error is made, we go back and correct that error as quickly as we can. We do that every day of the year as we deal with our customers. What we want to focus on again, and I keep stressing this, is getting the problem fixed. If, in fact, this error was created by Y2K, we want to get that problem fixed and focus our attention and resources on that rather than on a litigation effort.

    Mr. SANDLIN. If the problem is fixed—if there is an error and a problem is fixed, but the damage has been done, then is your idea the bona fide error provisions would be a defense, or you would lose that defense because the damage has been done and there is no opportunity to cure?

    Mr. ANDERSON. If there is a bona fide error, like if there is an error today in some banking transactions we do, we make the customer whole. We go through a series of research, and we correct the problem and make the customer whole. We don't see that changing going forward.

    Mr. SANDLIN. Thank you.

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    Chairman LEACH. Mr. Gonzales.

    Mr. GONZALES. Thank you, Mr. Chairman.

    Quickly, just going back, I think, on what my colleague was asking about, and that is the Y2K litigation that is being proposed, prospectively obviously assumes there is going to be a serious problem that needs to be addressed early in preparation, it will alter existing contractual obligations, of course. It will restrict and have caps on damages and so on. That is something that we need to deal with.

    But in being lobbied to vote for something of that nature, one thing that was pointed out to me—and I am going to ask all of you—is that without that type of legislation, that it would impede preparation for the Y2K problem. In other words, to address the remediation is one thing, but addressing it now and early as Frost Bank has done and others that have testified here, does any proposed legislation limiting liability, mandating mediation and so on, in any way impede preparation? I am talking about just preparation to meet the problem.

    Mr. ANDERSON. If I could start out, I would again say that I think what this legislation would do would be to clear the air, much like this Good Samaritan legislation passed last year that encouraged free and open disclosure and sharing of information to help each other on the Y2K effort. I think this legislation, what it would do is take away some of the fears, especially of large class-action suits, frivolous suits, and allow us really to concentrate our effort on getting the problem fixed, instead of fear of litigation.

    Mr. BARTON. Yes, Congressman, I would echo what Mr. Anderson said as well. I think we need to concentrate on making our customer whole. That is not going to change our philosophy. We have been doing that for 130 years.
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    We do not see Y2K as any unique threat to customers that would cause the damage that we do not already have today. When a problem occurs with a payment system or with any other system, we fix the problem. If the customer is damaged, we make the customer whole. We do not see that changing, and any legislation that can assist us with going forward with that philosophy we think would be helpful.

    Mr. REDMOND. I like to say in our bank, we do the right thing, and that is the way we treat our customers. It is personal relationships. We care about them and they care about us, and we can't think about outside of that personal relationship. That is just the way we do it. We do the right thing.

    Mr. GURETZKY. From SAC Federal Credit Union's perspective—and I think generally I can speak for all credit unions—first off, I don't think as far as impeding Y2K progress, I think that was your specific question, I do not believe that we are heading down a railroad track and our regulators, just because there is legislation which would limit the liability, I don't think they are going to let up one way or another as far as Y2K progress. So in answer to your specific question, I don't think that would impede Y2K progress.

    As far as SAC Federal Credit Union is concerned and as far as credit unions in general are concerned, our customers are members and they own the institution. So they are our bosses. So we are going to do what is right for our members; we have done what is right for them; we will continue to do what is right for them, and any limit of liability will not hinder us from doing the right thing for our members.
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    Mr. REARDON. Thank you, Congressman. You have posed a very interesting question. If I could, I want to speak both from a position of Coastal Federal Credit Union and the CUNA Y2K subcommittee.

    In 1996, as we were preparing our company's Y2K plan, I was in my office one day thinking about the nature of the governance of credit unions. We have volunteer, unpaid directors of credit unions in this country. As such, I am thinking, what would happen if I failed in my role or the executive team failed to prepare for the issue, and what if a suit were brought against our directors? What if we became a defendant in a lawsuit? What would that do to our directors' personal net worth? I am thinking about myself at the same time. We all have investments and personal financial situations.

    So what I did was I took my written plan and I submitted it to our counsel of record, a prominent law firm in Raleigh. They looked through this plan, and I had them submit a letter of opinion, a full-page opinion, to the chairman of our board and issued a copy to each director of our board, in which case, and I think the gentleman at the end made the comment, that the counsel viewed the Y2K issue as a normal operating instance for our organization.

    As such, given the progress that we made and the approach we were taking, they felt there were no silver bullet solutions to the Y2K problem and that our directors would be protected and also our institution should we be sued as defendants.

    Now, on the other hand, from Coastal's perspective, because we are operating in a Y2K environment, I would have to put my position and say, ''What if I were a plaintiff in a legal action, how would we handle that?'' Because we think all of our vendors are in good shape, that is not so much a concern to us today as if I were an institution whose vendors had not responded today and were not totally compliant with their software.
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    Ms. CASEY. Mr. Gonzalez, when we look at the confidence levels that the banks say they have in the third parties and in their own customers, if you can find a way to limit the liability and they can exchange more information more readily, we think it might be beneficial. But we don't have any further opinion on the legislation.

    Mr. GONZALEZ. Thank you very much.

    Thank you, Mr. Chairman.

    Chairman LEACH. Mrs. Jones.

    Mrs. JONES. Thank you, Mr. Chairman. I will be brief, ladies and gentlemen, or at least I will try.

    I am referencing, not to brag, but having served as a judge previously for almost ten years, I struggle when I hear these terms ''frivolous suits'' and ''large class actions,'' because I have seen people who have truly been harmed in my courtroom as a result of activity. My prior statements were that I don't want to create any greater liability because of Y2K. I view it, as some of you have said, that if in fact you have a responsibility to your consumer, then you ought to be responsible, no matter how it was created. If it was Y2K, or your computers failed not because of Y2K or some other instance. So I struggle to talk about limiting liability.

    But on the other hand, I also would say that I think that as we go through this process, we have to look to what are true damages, and that may be the piece that may be of greater concern.
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    What I kind of wanted to know was, could you contemplate a fact situation that was created as a result of a Y2K glitch that is not covered by some legal liability that you have right now? Mr. Anderson, or anyone on the panel? I was trying to think through that.

    Mr. ANDERSON. I don't know if Y2K will create any new problems.

    Mrs. JONES. Cause of action I guess is the word I want to use.

    Mr. ANDERSON. We are involved in millions of financial transactions daily, and the concern I think with the Y2K issue generally is that because of the time date, that those transactions will not happen as they should, and because they don't happen as they should, someone may be damaged because of failure to take the appropriate action. So I don't know if it is a new thing, anything new, but just a continuation of what we have seen, and we deal with that.

    But I think in going back, our purpose in supporting this legislation, and I speak for Zions Bank, is not to limit any type of suits going forward that are legitimate, but we do think that having this 90-day cure period, where parties get together, they identify the problem, they work to resolve the problem, is really the key.

    That is what we really want at the end. We want the problem resolved so we can all go forward. If after the 90 days the problem is not solved, people can move forward with their suit.

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    Mrs. JONES. I think back and laugh. I used to visit elementary schools and talk to kids, and the craziest questions I used to get. One kid said to me, ''My grandmom spanks me; can I sue her?'' I said: ''no.'' I think how we have become such a litigious society, and how do we work through for purposes of Y2K the public PR piece to avoid people getting into that particular jam.

    Mr. ANDERSON. If I can just respond, I think that is a very good example. I think one of the concerns that we have is that some of these normal transactions that may go awry that we normally fix and correct may be brought to a suit, and Y2K may be used as the excuse for bringing the suit. So there is a lot of wasted resources put on that.

    Mrs. JONES. I am almost out of time. My last question is to Ms. Casey. In light of the fact that your firm conducted the survey, can you tell us the most striking thing from that survey that you found? I guess on both the positive side and maybe the negative side as well?

    Ms. CASEY. I think the most positive thing was the budgets, that the community banks had definitely increased their level of investments in the Year 2000 and began to realistically budget, and the budgets are reasonable based on the size of the institution as well as their technology expenditures as a whole.

    Probably the greatest deal of concern is the lack of concern that they expressed in their borrowers. That was a little bit surprising to us, that they ranked borrowers the lowest in the confidence levels. But then again, they were just beginning to get the information from their borrowers when we did the survey last November. So we would think today if we did it, they would probably be much higher.
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    Mrs. JONES. Thank you, Mr. Chairman.

    Chairman LEACH. Well, thank you.

    Let me just say, first I think it is very interesting, and I think it is more by accident than design, that we have representatives of five truly excellently-run institutions. One from the Rocky Mountains, one from the Southwest, one from the Far West, one from the Midwest, and one from the Deep South.

    And I just want to ask one question that is a geographic question to you, Mr. Barton, that your institution in San Antonio is along a border. One aspect of Y2K that we think is emerging is that America's financial institutions may be better prepared than a number of other countries. This may precipitate what could be a run to American institutions away from foreign institutions.

    Is this anything you witnessed to date as a quasi-border area institution in San Antonio, and do you have peculiar problems that others may not? And do you have any peculiar liquidity problems? And do you have dual currency liquidity issues? And is this an aspect of your institution that the others may not confront?

    Mr. BARTON. Thank you for the question, Mr. Chairman. I will try to come up with an answer that will cover all the sub-questions you had rolled up in that.

    We are a correspondent bank for many of the Mexican banks as well as Mexican businesses. One of the first things I did—because I am close to Mexico, not only geographically, but I married a girl from there as well, I am very familiar with the culture, with how they do business. I have been going to the country for about fifteen years and am very involved with all business affairs in that country. And one of the first things I did back in 1996 was look at what was Mexico's efforts with Y2K, specifically the banks. I noticed that the central bank had set the same deadline as the Federal Reserve System had here for all banks to be remediated and complete in November-December of 1998.
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    From my understanding and the information I have, most of those banks have accomplished that.

    We hosted an awareness session for the Mexican banks which I conducted in Spanish, and am happy to report that the questions I got were very similar to the issues that we were discussing here back in 1997. I am pleased to report that these folks appeared to have taken all of the same steps we had and are on the same time-line that we are.

    Regarding liquidity issues, we do not forsee any as such. One of the first concerns that I brought to the attention of our chief credit policy officer was the Mexican portfolio, and as we reviewed those businesses that we had extended credit to that were across the border, we did the due-diligence to assess their viability as a company and their ability to repay the loan based on Y2K preparedness and other risks. I am pleased to report that we did not identify any significant issues there.

    So, I think in our situation, because we do not have a very large percent of our business, fee income or otherwise, with Mexico we would probably be insulated from any of the problems that would occur if they did occur down there. Dual currency, we do not see an issue with that, because we do sell Mexican pesos, but we do not have any large amounts of money at risk regarding that currency.

    As far as any other banks with international relationships. Obviously you would have to look at the foreign deposits that come into those banks and their loan-to-deposit ratio counting those foreign deposits and how that could impact their liquidity. But we do not have to depend on hundreds of millions of dollars coming in from that country through wire transfer that may not originate because of the Y2K problem. So I do not see that as a specific concern. Our concern was mainly with the small business and credit risk and the rest of it. We do not see any major issues at this point.
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    Chairman LEACH. I appreciate that.

    Let me turn to Mr. Anderson. I don't know, does your bank have any foreign presence? Do you have a branch——

    Mr. ANDERSON. We don't have any foreign offices.

    Chairman LEACH. From the ABA's perspective, have you heard any kinds of concerns of this nature? Are you hearing America's larger banks with foreign presences seeing infusions of capital or not? Or infusions of business opportunity that wouldn't have been there because they might be better prepared for Y2K than some of their competition?

    Mr. ANDERSON. Well, to do justice to that question, let me come back to you with a written report for the record. I think a lot of the large banks are testing, especially in the wire systems and the transfer of funds back and forth, and I know this is an issue that the President's Y2K Council is looking at very closely as they have had group meetings with the central banks of most of the countries around the world.

    Chairman LEACH. Thank you. I appreciate that. Does anyone else have any questions?

    Mr. SANDLIN. Yes, Mr. Chairman. Just briefly a comment back on the liability issues. I think it is important that we keep our eye on the prize and work on fixing the Y2K problem, if there is a problem, and not get misdirected on always talking about litigation. I am a lawyer and have served on bank boards for ten years, so I am familiar with both ends of it. I think sometimes when we talk about this problem, we are only talking about litigation, and that is not it.
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    I read Computer World the other day, and they said the problem with this is not with the individuals, it is not with gangs or with lawyers, it is with the vendors. The language that was used was ''hook, line, and sinker.'' They have known about it since the 1970's. One of the problems with this legislation is, and I asked you about the bona fide errors provision, but it creates a new defense of ''reasonable efforts.'' If you want to see an explosion in litigation, you start trying to change contractual law to give a legal defense of ''reasonable efforts.''

    Our whole commercial process depends upon contracts. A contract is a contract. A deal is a deal. A breach is a breach. If you want to start providing new provisions and new defenses in the law of ''reasonable efforts,'' that basically says ''We don't care what the contract is, if you made a reasonable effort, that is a legal defense,'' you will see an explosion in litigation like you have never seen. I think that is a very, very poor provision. I guess the end of this long story is, let's work on solving the problem and don't get misdirected like we do on a lot of things, about worrying about unknown, unfiled pie-in-the-sky lawsuits.

    Liability is liability, and some of my colleagues pointed out, I think we have the present law, our statutory law, both at the State and Federal level and common law, that covers problems that would come up. You have tort, you have contractual law. People meet prudent tests or they do not. And while Y2K is unique and there are some problems we need to resolve, and I think it is a good opportunity, a good thing to have opportunities to cure, fix problems, that is great, I think we need to be very careful and deliberate in trying to solve a problem and not create a new problem where one didn't exist previously.

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    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you, Mr. Sandlin. I may have a little different perspective on legislation, but I will say in the banking arena, current law probably is a greater protector than in any other area of American commerce, and the banking statutes do have provisions on accidental noncompliance that might well be a better protection than new law. I think the banking industry is going to want to give that a very serious review on whether new law is an advantage or disadvantage.

    But all of us are going to look at this legislation from other perspectives as well as the banking industry. But I think financial services is certainly just one area of American commerce.

    Mr. Gonzales.

    Mr. GONZALEZ. Nothing else, thank you.

    Chairman LEACH. Let me thank you all. I will say this committee has gone from the macro side of regulation to the micro side of business practices, and it is hard not to express a great deal of confidence in each of your individual institutions. We just hope that the rest of the industry matches yours. But I will say that I was impressed with your individual testimonials of what individual banks are doing that represent, I think, models for the country. I want to thank each of you for your leadership and your institutions, and it is hard not to have a good deal of confidence, at least in the way your institutions are run. Thank you very much.
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    The hearing is adjourned.

    [Whereupon, at 1:40 p.m., the hearing was adjourned.]