Circular
Addressing Year 2000 Issues in Foreign Banking Organizations
December 10, 1997
Circular No. 11005

To the Chief Executive Officers for United States Operations of All Branches and Agencies of Foreign Banks and for Foreign Bank Holding Companies, in the Second Federal Reserve District:

The potential disruption that the Year 2000 could have on normal banking operations in the United States can be significant. U.S. banking supervisors are taking this issue very seriously and are currently in the process of reviewing the readiness of every banking institution we supervise by the middle of 1998. While some of the reviews will be done as part of regularly scheduled examinations, most will be done as special Year 2000 target reviews during January and February 1998.

We are finding that these Year 2000 reviews are posing special challenges for foreign banking organizations (FBOs) that may be relying on head office led projects to address the Year 2000 issue. This circular provides guidance regarding what the examiners expect to see in their reviews and how we will follow up on these reviews.

Background

December 31, 1998 -- when financial institutions serving large numbers of other financial institutions by providing correspondent, clearing, or other services should be largely completed with their external testing with similar large institutions.

As part of this Bank's regular examination process and during specially targeted Year 2000 reviews, progress against these targets is being assessed by the examiners.

Year 2000 Informational Needs of Examiners

The principal focus of examiners during their Year 2000 reviews will be on the plan that has been developed to address the processing, risk management, and informational needs of the U.S. business activities of the FBO. To the extent that the FBO relies upon applications that are developed, maintained, or run at the head office or other location outside the U.S., Year 2000 plans for these applications should be made available to the examiner.

Particular attention will be devoted to the schedules for applications becoming Year 2000 compliant and tested, both internally and externally. Examiners will also assess whether there are appropriate reporting systems in place to track progress and senior management review of progress to assure that schedules do not fall behind acceptable limits.

Examiners will want to meet with senior U.S. officials in the FBO to discuss Year 2000 efforts. Where FBOs rely on vendors, special attention will be devoted to assure that due diligence reviews are completed on the vendors in a timely manner and that their products are thoroughly tested within the FBO's overall plan.2 Contingency plans will also be discussed. While these review activities are no different than those followed with respect to financial institutions headquartered in the U.S., reliance on the head office for elements of the overall plan may leave information gaps in the material that the examiner will need to render a judgment on the overall preparedness of the FBO regarding its U.S. business activities. Filling these gaps prior to a review may significantly simplify the review process for both the FBO and the examiner. When the reviews are completed, the examiners will need to obtain progress reports at periodic intervals. Should the review identify areas of special concern, supervisory actions appropriate to the issues will be undertaken.3

Federal Reserve System Plans

The Federal Reserve has developed a comprehensive Year 2000 plan for its own systems. These plans are being communicated separately through circulars and Century Date Change Bulletins issued by our Year 2000 program office. Questions regarding these plans may be directed to Bruce Cassella, Vice President, Bank Services Office at this Bank or to Elaine Geller, Federal Reserve System Century Date Change Project Office at (415) 974-3148.

Questions or comments about Year 2000 issues more generally may be referred to George Juncker, Vice President, Bank Supervision Group, or to William Francis or Thomas Wines, Examining Officers, Bank Supervision Group, respectively.

1 These circulars are: No. 10878, September 27, 1996, "Effect of the Year 2000 on Computer Systems"; No. 10937, April 4, 1997, "Year 2000 Alert"; No. 10951, May 14, 1997, "Interagency Statement on Year 2000 Project Management Awareness"; No. 10981, September 17, 1997, "Year 2000: A Global Concern"; and No. 10996, November 24, 1997, "Year 2000 Supervision Program".
2 Vendor relationship management has proven to be a particularly difficult issue for all financial institutions, and FBOs may want to attend the half day conferences sponsored by this Bank on January 6 and January 7, 1998, if this is an area where difficulties are being encountered. See Circular No. 10995, dated November 21, 1997, "Year 2000 Conferences," for the announcement of these conferences and to obtain a registration form.
3 Letter SR 97-29 describes the type of supervisory responses that will be taken with respect to Year 2000 concerns. This letter was distributed with Circular No. 10996, dated November 24, 1997, "Year 2000 Supervision Program."