Year 2000: Financial Institution and Regulatory Efforts to Address
International Risks (Letter Report, 04/27/99, GAO/GGD-99-62).

U.S. financial institutions actively participate in international
financial markets as dealers of foreign exchange and derivative
products, lenders to foreign organizations, and investors in foreign
securities. Concerns have been raised that U.S. financial institutions
could face significant problems in operating abroad--along with the risk
of huge losses on their trading and investment activities--unless
foreign markets and financial institutions have adequately prepared
their computer systems for the Year 2000 problem. This report assesses
the extent to which (1) large, internationally active U.S. financial
institutions have been addressing international Year 2000 risks; (2)
U.S. banking and securities regulators were overseeing these risks for
the institutions they regulate; (3) large foreign financial institutions
and their regulators are addressing Year 2000 risks; and (4) other
issues that may require attention before the upcoming date change at the
turn of the century.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-99-62
     TITLE:  Year 2000: Financial Institution and Regulatory Efforts to
	     Address International Risks
      DATE:  04/27/99
   SUBJECT:  Y2K
	     International cooperation
	     Systems conversions
	     Financial institutions
	     Information resources management
	     Data integrity
	     Financial management systems
	     Computer software verification and validation
	     Systems compatibility
	     Foreign corporations
IDENTIFIER:  Society for Worldwide Interbank Financial
	     Telecommunications System
	     Y2K
	     Germany
	     France
	     Japan
	     Korea
	     United Kingdom

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YEAR 2000 Financial Institutionand Regulatory Efforts

to AddressInternational Risks

United States General Accounting OfficeGAO Report to the Ranking
Minority Member Committee on CommerceHouse of Representatives

April 1999

GAO/GGD-99-62

United StatesGeneral Accounting Office Washington, D.C.  20548

General Government Division

B-281294

Page 1 GAO/GGD-99-62 Financial Institution and Regulatory Efforts

GAO

April 27, 1999 The Honorable John D. DingellRanking Minority
Member Committee on CommerceHouse of Representatives

Dear Mr. Dingell: On July 29, 1998, you requested that we review
the international risks thatthe Year 2000 computer problem poses
to U.S. financial institutions.

1 These

institutions are active participants in international financial
markets asdealers of foreign exchange and derivative products,
lenders to foreign

organizations, and investors in foreign securities. You were
concerned thatU.S. financial institutions could encounter
significant difficulties in operating internationally and could
potentially incur substantial losses ontheir trading and
investment activities if foreign markets and financial
institutions have not adequately prepared their computer systems
tocorrectly process Year 2000 dates.

To address your request, we assessed the extent to which (1)
large,internationally active U.S. financial institutions were
addressing international Year 2000 risks; (2) U.S. banking and
securities regulatorswere overseeing these risks for the
institutions they regulate; (3) large foreign financial
institutions and their regulators are addressing Year 2000risks;
and (4) other issues may require attention before 2000 arrives.

2

Large U.S. financial institutions have financial exposures and
relationshipswith international financial institutions and markets
that may be at risk if these international organizations are not
ready for the date changeoccurring on January 1, 2000. However,
the seven large U.S. banks and securities firms we visited were
taking actions to address these risks. Theyhad identified the
organizations with which they had critical foreign business
relationships, had assessed the Year 2000 readiness status ofthese
organizations, and were developing plans to mitigate the risks
that would be posed by the lack of Year 2000 readiness of one or
more of these
1For this assignment, we addressed the activities of large U.S.
banks and securities firms.

2You also asked us to review Year 2000 issues for the insurance
industry. We are providing the results of that work in a separate
report to be issued at a later date.

Results in Brief

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Page 2 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
organizations. They told us that they did not expect potential
Year 2000disruptions to have much long-term effect on their global
operations. U.S. banking and securities regulators were also
addressing theinternational Year 2000 risks of the institutions
they oversee. Banking regulators had issued guidance for banks on
addressing international Year2000 risks and were assessing bank
preparations for these risks during bank examinations. Securities
regulators, although not directly responsiblefor securities firms'
foreign activities, were assessing these firms' efforts to address
international and other external Year 2000 risks using
informationobtained through the regulated U.S. broker-dealer
affiliate.

Foreign financial institutions reportedly have lagged behind their
U.S.counterparts in preparing for the Year 2000 date change. One
of the major reasons cited for the lag was that these firms also
had to make systemsmodifications to prepare for the introduction
of a new European currency in January 1999. Officials from four of
the seven large foreign financialinstitutions we visited said they
had scheduled completion of their preparations for Year 2000 about
3 to 6 months after their U.S.counterparts, but they planned to
complete their efforts by mid-1999 at the latest. The officials
also said they were assessing the readiness of theentities with
which they did business. Foreign regulators in France, Germany,
Japan, Korea, and the United Kingdom said they were assessingthe
readiness of the institutions they oversee, but their efforts
generally appeared less extensive than those of U.S. regulators.
In addition, keyinternational market support organizations, such
as those that transmit financial messages and provide clearing and
settlement services, told usthat their systems were ready for the
date change and that they had begun testing with the financial
organizations that depended on these systems.Two international
organizations created to assist international Year 2000 efforts,
the Global 2000 Coordinating Group and the Joint Year 2000Council,
were also playing a major role in assessing readiness and helping
global financial market institutions and regulators address Year
2000issues.

As the Year 2000 approaches, some issues will continue to require
theattention of U.S. and foreign financial institutions and
regulators. For example, officials from the large U.S. and foreign
financial institutions wevisited said they were concerned about
the readiness of foreign infrastructure providers, such as those
that supply telecommunications,power, water, and other services.
The readiness of these organizations is important because
financial institutions and their internationalcounterparts depend
on these providers for their continued business

B-281294 Page 3 GAO/GGD-99-62 Financial Institution and Regulatory
Efforts operations. Another issue that financial regulators and
financialinstitutions said they were addressing that will require
continued attention was the need for mechanisms to coordinate
actions and informationamong regulators and other organizations
during the date change period. Promoting additional Year 2000
readiness disclosure by foreignorganizations was an additional
issue for which regulators have taken steps and which financial
institutions saw a continued need to address. As2000 approaches,
the availability of such disclosures will be critical for
financial institutions in planning for and addressing Year 2000
risks. Inaddition, regulators acknowledged the need to continue
developing strategies for communicating the readiness status of
the financial sector toalleviate concerns among members of the
public.

The Year 2000 problem exists because the data that computers store
andprocess often use only the last two digits to designate the
year. On January 1, 2000, such systems may mistake data referring
to 2000 as meaning 1900,possibly leading to numerous errors and
disruptions in processing. Financial markets in the United States
and countries throughout the worldare highly dependent upon the
accurate transmission of electronic information, and thus the
systems they use must be readied to correctlyprocess Year 2000
dates.

If the computer systems used by foreign financial markets and
institutionsare not ready for the Year 2000 date change, U.S.
financial institutions could be adversely affected in various
ways. If systems used by foreignmarkets fail, U.S. institutions
may not be able to alter their holdings of foreign financial
assets. Market closures and the resulting uncertaintycould also
cause dramatic drops in prices, thereby producing large losses for
U.S. institutions holding such assets. If foreign financial
institutions'systems are not ready, U.S. institutions may not be
able to access financial assets held by their foreign business
partners and customers or may notreceive payments owed by such
institutions. If the systems used by foreign infrastructure
providers, including those providing telecommunications,power,
water, and other services, are not also ready for 2000, U.S.
institutions may not be able to communicate with its foreign
businesspartners and customers. They may also be unable to conduct
financial transactions with such institutions or within affected
countries.

Background

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Page 4 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
To gather information on the extent of U.S. financial
institutions'international activities, we obtained data on U.S.
banks' lending exposures from U.S. banking regulators. For
information on U.S. entities' investmentsin foreign securities, we
obtained information from the U.S. Bureau of Economic Analysis and
from Morningstar, Inc., which is a privateinvestment research firm
that maintains a proprietary database of U.S. mutual funds'
investment portfolios. We obtained data on foreignexchange and
over-the-counter derivatives markets from the Bank for
International Settlements. To gather information on how U.S.
financialinstitutions were addressing international Year 2000
risks, we interviewed officials and reviewed available Year 2000
documentation from theheadquarters offices of seven major banks
and securities firms that were among the most internationally
active financial institutions. Weinterviewed additional
representatives of some of these firms in countries outside of the
United States. We also interviewed U.S. banking andsecurities
regulators to obtain information on how U.S. financial
institutions were assessing their international Year 2000 risks.
To gather information on how U.S. regulators were
addressinginternational Year 2000 risks, we reviewed guidance and
other issuances and discussed international Year 2000 risks with
representatives of theFederal Reserve, the Office of the
Comptroller of the Currency (OCC), and the Securities and Exchange
Commission (SEC). We also reviewed theseorganizations' internal
analysis summaries of U.S. and foreign financial institutions'
progress in addressing Year 2000 and securities firms'regulatory
reports by discussing their Year 2000 efforts.

To determine how foreign financial institutions and regulators
wereaddressing Year 2000 risks, we interviewed representatives of
seven large financial institutions, three market support
organizations, and regulatoryagencies in France, Germany, Japan,
Korea, and the United Kingdom. We also reviewed reports and
statements by other organizations3 that haveassessed the Year 2000
readiness of foreign financial institutions. The foreign countries
whose Year 2000 efforts we evaluated included 4 of thetop 10
countries in which U.S. organizations had significant lending and
mutual fund investment exposures. In addition, we interviewed
officialsfrom and reviewed Year 2000-related documents provided by
international market support organizations that are responsible
for clearing and settlingtransactions, transmitting payment
instructions, and other financial

3These included organizations such as the Gartner Group, which is
an information technology

consulting firm, and the Global 2000 Coordinating Council, which
is a private sector group set up toaddress international Year 2000
issues.

Scope andMethodology

B-281294

Page 5 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
messages. We also interviewed officials from and reviewed
documents ofkey international organizations that were established
to address Year 2000 problems in global financial markets,
including the Global 2000Coordinating Group and the Joint Year
2000 Council.

To identify issues that may require further attention, we
interviewedofficials at the organizations we contacted. We also
reviewed reports and other documents issued by U.S., foreign, and
international organizations.Information on foreign institutions
and regulation in this report is based on interviews and secondary
sources, not our independent technical or legalanalysis.

We did our work from July 1998 to March 1999 in accordance
withgenerally accepted government auditing standards. We obtained
oral comments on a draft of this report from staff of the Board of
Governors ofthe Federal Reserve System and SEC and written
comments from the OCC (see app. I). We discuss their comments at
the end of this letter. Large, internationally active U.S.
financial institutions, which account formost of the financial
exposures and relationships with foreign financial institutions
and markets, may be at risk if the foreign organizations are
notready for the Year 2000 date change. However, officials from
the U.S. institutions we visited told us that they have mostly
completed the changesrequired to ready their own computer systems
to process Year 2000 dates. With financial relationships around
the world, these officials also said theywere assessing the Year
2000 readiness of their customers, business partners, and
financial counterparties. Further, they said that they
arepreparing plans to mitigate the risks their international
activities pose to their operations, but that they generally did
not anticipate Year 2000problems in other countries to have a
significant long-term impact on their business operations.
Although many financial institutions may be active
internationally, fewerthan 25 large institutions account for most
of the total foreign financial exposures of U.S. banks and
securities firms. The Year 2000 readiness offoreign organizations'
computer systems is important to these large U.S. financial
institutions because they have substantial international
financialexposures.

U.S. financial institutions are active in various global financial
activities.Large U.S. banks and securities firms are active
participants in the foreign exchange markets in which transactions
valued at $1.5 trillion wereestimated to be occurring daily as of
April 1998. Determining the portion of

Large, InternationallyActive U.S. Financial Institutions
WereAssessing International Risks

Large U.S. FinancialInstitutions Are Active in Global Financial
Markets

B-281294

Page 6 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
U.S. financial institutions' foreign exchange activities that are
conductedwith foreign entities is difficult, but about 18 percent
of the daily volume of foreign exchange trading is reported to
occur in the United States. Thecomparable share of global daily
trading volume in London, which is the most active foreign
exchange trading center, was about 32 percent. U.S.firms are
active in London and other world foreign exchange centers as well.
Over-the-counter derivatives dealing is another global
financialmarket activity in which U.S. financial institutions
actively participate.

4

About $70 trillion in notional principal was outstanding in June
1998, withU.S. banking institutions having an estimated $28.2
trillion outstanding as

of that time.5 U.S. banks are also active globally as lenders of
funds and, as of June 30,1998, had a total foreign lending
exposure of about $487 billion. Six U.S. banks accounted for over
75 percent of this total exposure. As shown intable 1, U.S. banks'
largest lending exposures were concentrated in the major European
markets and Japan.

Dollars in millions Country Lending exposure Germany $47,845United
Kingdom 36,835

Japan 36,531 France 32,709Italy 26,464

Brazil 25,602Canada 21,868 Netherlands 19,940 Switzerland
19,820Spain 18,751

Total $286,365 Source: U.S. Federal Financial Institutions
Examination Council.

4Derivatives are financial products whose value is determined from
an underlying reference rate, index,

or asset. The underlying include stocks, bonds, commodities,
interest rates, foreign currency exchangerates, and indexes that
reflect the collective value of various financial products. Over-
the-counter

derivatives are distinguished from exchange-traded derivatives
because they are privately negotiatedfinancial contracts.

5Notional principal amounts, which are the amounts upon which
payments are often based, are one way that derivatives activity is
measured. Although these amounts are indicators of volume, they
arenot necessarily meaningful measures of the actual risk
involved. The actual amounts at risk for many

derivatives vary by both the type of product and the type of risk
being measured.

Table 1: Top 10 Foreign CountryLending Exposures for U.S. Banks as
of June 30, 1998

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Page 7 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
Although most of their lending was in developed countries, large
U.S.banks also had exposures to organizations in various emerging
market countries. As shown in table 1, exposures to organizations
in Brazil rankedamong the top 10 for U.S. banks as of June 30,
1998. U.S. banks also had lent over $16 billion to Mexico and had
exposures to other emergingmarket countries in Latin America and
the Caribbean totaling about $31 billion. U.S. banks' lending
exposures to Asian countries, excluding Japan,were about $41
billion and to Eastern Europe were about $11 billion.

U.S. entities are also active in securities investing
internationally. As ofyear-end 1997, U.S. entities held foreign
financial stocks or bonds worth about $1.45 trillion, according to
data compiled by the U.S. Bureau ofEconomic Analysis. However, SEC
officials told us that only about 12 securities firms engage in
substantial international activities. Other entitiesactive in
investing in other countries include U.S. mutual fund
organizations. According to information compiled by Morningstar,
Inc.,U.S. mutual funds' foreign equity investments were also
concentrated in the major European markets and Japan (see table
2).

Dollars in millions Country Investment valueUnited Kingdom $69,958

France 36,975Netherlands 34,073 Japan 33,377 Germany 25,960Canada
22,429

Switzerland 18,990Italy 15,181 Sweden 14,689 Finland 12,474 Total
$284,106 Source: Morningstar, Inc.

Equity investments by U.S. mutual funds outside of the largest
countriesgenerally represented a much smaller portion of the
mutual funds' total foreign activity. According to the data
compiled by Morningstar, Inc.,investments in markets outside of
the largest countries accounted for only 25 percent of the mutual
funds' total foreign investments.

Table 2: Top 10 Foreign Country U.S.Mutual Fund Equity Investments
as of January 1999

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Page 8 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
U.S. financial regulators have determined that large U.S.
financialinstitutions are assessing the Year 2000 readiness of
their key financial relationships. Bank regulators required all
U.S. banks to completeassessments of their internal exposures,
including international exposures, by September 30, 1998. Bank
regulators told us that their most recentexaminations showed that
large U.S. banks had adequately completed these assessments. SEC
officials told us that large U.S. securities firmshave reported
that they are also gathering information about the Year 2000
readiness of organizations in which they have key financial
exposures,including international exposures.

At the large U.S. banks and securities firms we contacted,
representativesof these institutions described (1) the progress
they had made in readying their own systems to process Year 2000
dates and (2) the actions they hadtaken to assess their
international exposures. Officials at each of the seven
institutions we contacted told us that the work and testing needed
to makenearly all of their systems ready for 2000 was completed by
the end of 1998. The securities affiliates of six of these
institutions participated in asecurities industry test in July
1998, which required them to have part of their systems Year 2000
compliant by that date. Officials at these institutions said they
also have incorporated into theiroverall Year 2000 programs
assessments of the readiness of key domestic and international
customers, business partners, and their counterparties infinancial
transactions. The officials said they had detailed programs to
both prioritize and assess the readiness of their key suppliers,
electroniclinkages, business partners, and customers. In most
cases, they described using questionnaires to make these
assessments. The officials also saidthey were sending teams to
make on-site visits and to personally review the Year 2000
programs of the entities that were their highest
priorityexposures. For example, representatives of one of the
financial institutions we contacted told us that they had
determined that, of the over 15,000relationships the firm had
worldwide, 4,000 were deemed to be critical to its operations.
They said they prioritized these relationships using
variousfactors, including the extent of business the firm did with
each organization. The firm identified about 450 domestic and
foreign organizations that itconsidered most critical to its
operations, which included about 200 providers of information
technology and infrastructure services and about250 financial
institutions. To assess the readiness of these organizations,
officials at this firm told us that they sent survey to the
organizations andwere conducting on-site visits during which they
were attempting to

Large U.S. FinancialInstitutions Are Assessing the Readiness of
Their KeyInternational Financial Relationships

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Page 9 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
review these organizations' Year 2000 project plans. The officials
said theyalso were holding discussions with the organizations'
staff on at least 10 areas of concern, such as management
involvement and testingprocedures.

Officials of the U.S. financial institutions we contacted said
thatcontingency planning would be the primary focus of their Year
2000 efforts in 1999, because they have generally completed system
remediation andare continuing with testing efforts. Among the
efforts that officials at these institutions described were those
designed to minimize disruptions to theirbusinesses operations
arising from problems encountered by their own institutions, their
business partners, or infrastructure providers. Such stepsincluded
having alternate power or telecommunication sources or arranging
to conduct financial transactions with more than one institutionin
other countries in the event that their normal partner experienced
Year 2000 problems. Representatives of the U.S. financial
institutions we contacted said theyplanned to use the results of
their assessments of outside organizations in making business
decisions regarding whether they should maintain thesame levels of
exposure or activity with these organizations. Most of these
financial institutions expected their main foreign counterparts to
be readyand did not anticipate having to alter large numbers of
business relationships for Year 2000 readiness reasons. We talked
to fourrepresentatives of financial institutions about their
firms' foreign financial relationships. The representatives said
that they chose to do business indifferent foreign markets because
they believed these relationships and investments were sound. The
representatives also said that they weredetermined to remain
committed to these investments until the business fundamentals in
these countries were altered. The Year 2000 readiness of the
organizations in some countries, includingthose considered to have
made less progress in their preparations than U.S. financial
firms, is less likely to have a serious impact on the U.S.
firmsbecause of recent events in world markets. For example,
officials in Russia have already acknowledged that they lack the
resources to adequatelyaddress Year 2000 problems. However,
according to officials of most of the U.S. financial institutions
we contacted, exposures in markets such asRussia, Eastern Europe,
and Southeast Asia have already been substantially reduced due to
the market turmoil that has occurred in thoseregions since 1997.
According to Morningstar, Inc., data, U.S. mutual fund investments
in Russia totaled just $181 million in January 1999, or less than1
percent of all such funds' foreign investments. Banks were more
exposed

Large Financial InstitutionsWe Contacted Anticipated a Limited
Year 2000 Impacton Their Activities

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Page 10 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
to Russian organizations, with over $6 billion in loans
outstanding, but thiswas just 1.3 percent of U.S. banks' total
foreign lending exposure in 1998. Officials from most of the U.S.
financial institutions we contacted saidthat, in their view, the
impact of Year 2000 disruptions in other countries' markets was
not expected to be severe. For example, they said that theirfirms
were advising clients with investments in countries that were more
likely to experience Year 2000-related disruptions to, at worst,
be preparedfor periods of difficulty with payments and settlements
in these regions ranging from a few hours to a few weeks. Because
these officials believethe duration of any Year 2000-related
problems will likely be short, they are advising their clients not
to alter their investments solely on the basisof Year 2000-related
concerns. Instead, they suggested balancing the impact of these
potential, temporary disruptions against the merits of
theinvestments they have made in these regions.

One of the large U.S. securities firms we contacted issued a
researchreport on Year 2000 readiness in January 1999.

6 The report stated that,

although significant failures by foreign organizations to make
payments orto deliver securities could conceivably disrupt
segments of the U.S.

financial system, the U.S., European, and other monetary
authorities havethe capability to cover any resulting liquidity
shortfalls. Also, a research analysis done by another of the
securities firms we contacted examinedthe Year 2000 readiness of
various industrial sectors in the United States and at least 19
other countries.7 This report noted that Year 2000 problemswould
probably not cause a major disaster, but that the problems had
more potential for disruption in emerging markets. Nevertheless,
thereport stated that companies will likely cope with Year 2000
problems in the same ways they do during power outages or other
disruptions oftelecommunications or computer services.

U.S. bank and securities regulators are assessing the
international risksfaced by the entities they oversee. These
regulators have approached oversight of Year 2000 issues on the
basis of their overall regulatorymandate. The approach taken by
bank regulators focuses on their regulatory mandate to protect the
safety and soundness of the bankingsystem. Without direct
authority to regulate the foreign affiliates of U.S. broker-
dealers, SEC has also assessed the international risks that
Year2000 problems may pose to the securities market participants
it regulates.
6Getting Over the Bug: An Assessment of the Y2K Preparedness of
the S&P 500 Companies, Morgan

Stanley Dean Witter (New York, NY: Jan. 1999). 7Y2K: Implications
for Investors, Merrill Lynch (New York, NY: June 1998).

U.S. Banking andSecurities Regulators Are AssessingInternational
Year 2000 Risks

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Page 11 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
U.S. bank regulators view the Year 2000 problem, including the
risks posedby banks' international activities, as potentially
threatening the safety and soundness of individual institutions.
The regulators have jointly issued atleast three sets of guidance
that address the risks posed to banks from potential Year 2000
problems experienced by their customers, suppliers,and other
business partners, including those in other countries. In a March
1998 statement, bank regulators required banks to assess the Year
2000readiness of both their domestic and international customers,
including organizations that borrow from, provide funds to, or
conduct capitalmarket transactions with their institutions.

8 The regulators required banks

to have these assessments substantially completed by September 30,
1998.

Since 1997, bank regulators have reported that they conducted at
least oneexamination of all U.S.-chartered banks, including the
foreign branches of overseas banks. On the basis of these reviews,
bank regulators rated theYear 2000 progress of about 96 percent of
the institutions examined as satisfactory. The regulators started
a second round of examinations inSeptember 1998. This round is to
focus primarily on testing, contingency planning, and efforts to
assess the readiness of external parties. Accordingto
representatives of the Federal Reserve and the OCC, which oversee
banks with international operations, large banks appear to have
conductedtheir customer assessments adequately, but some smaller
institutions had failed to conduct assessments of all the
organizations whose Year 2000readiness could affect their banks.

SEC is charged with protecting U.S. investors and ensuring fair
and orderlymarkets, but SEC does not have the authority to
regulate the international activities of U.S. securities firms
that are done outside of the regulatedbroker-dealer.

9 However, SEC has assessed the readiness of U.S. securities

markets and the organizations that participate in them, including
anyrelevant international activities of these organizations. SEC
has conducted

examinations of securities markets, broker-dealers, investment
companies,investment advisers, and other organizations they
regulate as part of their Year 2000 oversight effort. In addition,
since 1990, SEC has had theauthority to assess the degree of risk
that the securities firms' unregulated

8Interagency Statement: Guidance Concerning the Year 2000 Impact
on Customers, Federal Financial

Institutions Examination Council (Washington, D.C.: Mar. 17,
1998). 9Large U.S. securities firms generally consist of many
legal entities under a parent or holding company structure. Legal
entities that conduct securities activities with U.S. customers
must register with SECas broker-dealers and subject themselves to
regulation by that agency.

U.S. Bank Regulators AreConcerned About Bank Safety and Soundness

Securities Regulators LackDirect Authority Over International
Issues

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Page 12 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
activities pose to the regulated entity.10 Under this authority,
SEC requiressecurities firms' regulated broker-dealer affiliates
to report on the exposures of their foreign affiliates and holding
companies. Finally, SECrequires the entities it regulates to
provide supplemental reporting on their Year 2000 efforts. SEC
officials have concluded that the Year 2000 risks posed by
U.S.securities firms' international activities are not
significant. They said that the foreign exposures of U.S.
securities firms are relatively modestcompared to their U.S.
operations. Moreover, the U.S. securities firms' most significant
international exposures were largely concentrated in theirU.K.
affiliates. These firms conduct considerable over-the-counter
derivatives activities in the United Kingdom, although
derivativesexposures may arise from business being conducted with
entities in other countries. SEC officials told us that U.K.
regulators were active inoverseeing these firms' operations.

Since the end of 1998, SEC has required the entities it regulates
to filereports discussing their efforts to address Year 2000
problems.

11 In these

reports, organizations are to provide additional information on
their Year2000 readiness efforts beyond that required in other
statements filed with

SEC. Organizations required to submit these reports include all
but thesmallest securities firms' regulated broker-dealer
affiliates and investment advisers with over $25 million under
management or that provide advice toan investment company
registered under the Investment Company Act of 1940. The primary
purpose of these reports is to provide SEC with morespecific
information on these entities' actions to address their Year 2000
problem. In the reports, the firms are required to describe their
plans,including the resources they have committed, their progress
against the various milestones in the process, and their
contingency planning efforts.For broker-dealers, the first reports
were required to be filed no later than August 1998 and are to be
filed again no later than April 1999. In addition,the regulated
entities are also to submit a separate report completed by the
firms' external auditors that serves as an independent
verification of theaccuracy of the firms' April 1999 submission.
These reports are to be made publicly available, and SEC has
posted the August 1998 submissions on itsWeb site.

10The Market Reform Act of 1990 authorized SEC to collect
information from regulated broker-dealer

about the financial condition of their holding companies, foreign
affiliates, and other entities that arereasonably likely to have a
material impact on the financial and operational condition of the
firm.

11See 17 C.F.R. $240.17a-5, 17 C.F.R. $275.204-5, and 17 C.F.R.
$240.17Ad-18 (1998).

B-281294 Page 13 GAO/GGD-99-62 Financial Institution and
Regulatory Efforts These reports also provide SEC with some
information on the extent towhich the entities it regulates are
addressing the risks posed by the Year 2000 readiness of external
organizations, including those in othercountries. One section of
the report seeks information on the activities firms have
undertaken to assess the readiness of any third parties
thatprovide mission-critical systems, including clearing firms,
vendors, service providers, counterparties, and others. In their
submissions, the broker-dealer affiliates are to identify the
number of the entities they rely upon, whether they have contacted
these entities regarding their Year 2000readiness, and whether
their contingency plans address the potential failure by third
parties to be ready. Although these reports weretechnically just
required to be filed by the securities firms' broker-dealer
affiliates subject to SEC regulation, SEC officials told us that
the firmssubmitting these reports have generally provided
information that addresses the global operations of their firms
outside of the regulated U.S.entity, when relevant.

We reviewed the August 1998 submissions by 11 of the largest
U.S.securities firms. All of these broker-dealer affiliates'
reports indicated that they covered the firms' global operations
and activities with foreignclients. The officials said that they
would use the information gathered in these reports to identify
entities that they may select for an on-siteexamination concerning
their Year 2000 preparations. SEC officials told us that, as of
March 1999, no organizations had been selected specifically
fortheir international operations. However, they said that they
have begun developing plans for examining the international
operations of selectedfirms, particularly for those firms active
in over-the-counter derivatives.

Like their counterparts in the United States, officials of the
foreignfinancial institutions we visited said they were also
working to ready their systems for the date change in 2000,
although their progress generallylagged those of U.S.
institutions. Financial institutions in the countries we visited
were also attempting to assess the Year 2000 readiness of
theircustomers and the organizations with which they do business.
Financial regulators in these countries told us that they were
also assessing the Year2000 efforts of the entities they oversee,
although their activities varied and appeared less extensive than
efforts made by U.S. regulators. Otherkey participants in
international financial markets include organizations that provide
market support services, such as financial messagetransmission and
clearing and settlement activities. The market support
organizations we contacted were also readying their systems for
2000.Finally, two international organizations, including one
focusing on regulatory issues and another focusing on issues of
concern to financial

Foreign FinancialInstitutions and Regulators We VisitedWere Also
Addressing the Year 2000 Problem

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Page 14 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
institutions, provided guidance and other assistance to financial
regulatorsand institutions attempting to address the Year 2000
problem. According to external assessments by consulting groups,
regulators, andothers, foreign financial institutions have
generally made less progress in addressing the Year 2000 problem
than have institutions in the UnitedStates. Officials of financial
institutions in the countries we visited said they were readying
their systems for the date change in 2000, but not all ofthese
institutions expected to complete their work in the same time
frame expected of U.S. institutions. One reason these
institutions' time framesare different is because many
institutions, particularly those in France and Germany, had placed
a higher priority on modifying their systems for theintroduction
of the new European common currency, called the euro, in January
1999.12 To prepare for the date change in 2000, U.S. regulators
expected banks andsecurities firms to have completed both internal
systems modifications and testing by December 1998. We obtained
Year 2000 readiness informationfrom seven large foreign financial
institutions. Officials from two Swiss institutions and one U.K.
bank said that they had mostly completed theirinternal systems
modifications and testing by December 1998. Officials from a
German institution we visited said that they had also
completedtheir internal systems modifications by December 1998,
but that they had completed the testing of only about 40 percent
of their systems byFebruary 1999. Officials from one of the French
institutions we contacted expected to complete systems
modification and testing by the first quarterof 1999, and
officials of the remaining two institutions--including one French
and one U.K. bank--expected to be finished by the second quarterof
1999.

Although their work on the euro has delayed their Year 2000
efforts,officials representing financial institutions in France
and Germany indicated that their euro efforts would help them
complete their Year 2000work on time. For example, these officials
said they already had detailed inventories of their information
systems and applications, existing testfacilities, and project
management teams with experience and personnel that could be used
for completing their Year 2000 programs. However,some officials of
financial institutions and regulators in the United States

12On January 4, 1999, 11 member countries of the European Union,
including Austria, Belgium, Finland,

France, Germany, Ireland, Italy, Luxembourg, Netherlands,
Portugal, and Spain, took a major steptoward merging their
national currencies into a single currency, the euro. From this
date, the

currencies of these countries can be exchanged for a fixed amount
of euros and financial transactionscan be conducted in euros.
Eventually, the euro is to replace the currencies of these
nations.

Foreign FinancialInstitutions We Visited Were Readying Their
Systems andAssessing Readiness of External Parties

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Page 15 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
and United Kingdom expressed concerns over whether institutions
incountries that had focused on the euro conversion would be ready
for the date change. These officials said they expected the larger
financial firmswould have sufficient resources to address the euro
conversion and Year 2000 efforts simultaneously. However, they
said they were concerned thatsmall to medium-sized firms would not
be able to adequately complete both projects in such short time
frames. Like financial institutions in the United States,
officials in the foreignfinancial institutions we contacted said
they also were assessing the Year 2000 readiness of their vendors,
electronic linkages, business partners, andcustomers. These
officials said they were also generally using surveys to assess
external entities' readiness and were conducting selected on-
sitevisits to review such organizations' Year 2000 programs in
more detail.

The financial regulators in the foreign countries we contacted
said thatthey had taken steps to assess the Year 2000 efforts of
the entities they oversee. However, their oversight program
approaches varied acrosscountries and, in some cases, appeared to
be less extensive than those made by U.S. financial regulators.
The guidance issued by foreign regulators and regulatory
requirements fordisclosing the readiness of foreign financial
institutions appeared to be less extensive than those mandated for
U.S. financial institutions. In theUnited States, bank regulators
issued at least 11 statements to provide guidance for banks on a
variety of topics to help them prepare for the Year2000. In
contrast, foreign regulators in the countries we had visited had
issued guidance to the institutions they oversee only once or
twice, andthis guidance covered a narrower range of topics than
the U.S. regulators' guidance. Regulators and financial
institution officials in several of thecountries we visited
indicated that the U.S. regulators' guidance had proved helpful.
For firms operating in these countries, the requirements regarding
publiclydisclosing their Year 2000 efforts also differed. In March
1998, the U.K. accounting standards body required firms to discuss
the following inpublic financial statements: Year 2000 risks,
efforts to address those risks, and the costs of those efforts. In
France, the securities regulatory bodymandated that firms issuing
publicly available securities make similar disclosures. Germany
required no such disclosures, but an official with aGerman bank
indicated that financial institutions were making disclosures for
competitive reasons. Financial regulators in Japan had issued
achecklist addressing Year 2000 issues to financial institutions
in their

Foreign FinancialRegulators Had Some Year 2000 Oversight
ProgramsThat Appeared Less Extensive Than Those ofU.S. Financial
Regulators

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Page 16 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
country, and regulatory examiners reviewing firms' activities also
wereusing this document. Regulators in Korea had issued guidance
on Year 2000 issues, but examiners in that country had also
reviewed guidanceissued by and received training from U.S. banking
regulators.

Foreign regulators had also placed less emphasis than U.S.
regulators onhaving the financial institutions they oversee assess
the Year 2000 readiness of their key financial relationships. U.S.
bank regulators requiredthe institutions they oversee to complete
assessments of the readiness of their key financial relationships
by September 30, 1998. U.S. securitiesregulators required U.S.
securities firms to report on their own readiness and the extent
to which their contingency planning assessed the readinessof
external organizations. In general, regulators in France, Germany,
Japan, Korea, and the United Kingdom had not specifically directed
theirfinancial institutions to make assessments of the Year 2000
readiness of their customers or other entities with which they
have critical financialrelationships. However, regulators in
France and Japan had included questions relating to third-party or
customer assessments in the surveysthey had administered to
financial institutions. In Germany, banks had worked through
industry associations to develop a standardizedquestionnaire for
use in obtaining information on customer readiness. Korean
regulators had recommended that banks take the Year 2000readiness
of their customers into account when making credit decisions.

Approaches to examinations also varied in these countries. In
Germanyand the United Kingdom, external auditors rather than
regulatory bodies usually conduct examinations of banks. Financial
regulators in both ofthese countries said they have tasked the
external auditors to address Year 2000 issues as part of the
reviews they conduct of banks. Financialregulators in the United
Kingdom also said they were making their own limited visits to
banks to discuss Year 2000 issues and have incorporatedYear 2000-
related questions into their regular examinations of securities
firms. In France, financial regulators said they were conducting
specificYear 2000 examinations of all banks and securities firms.
In Japan and Korea, multiple regulatory bodies said they were
involved in conductingperiodic and ad hoc reviews of financial
institutions' Year 2000 efforts.

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Page 17 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
Conducting international financial transactions frequently
requires theinvolvement of market support organizations, which
perform clearance and settlement or other necessary services. For
example, many financialinstitutions use the services of the
Society for Worldwide Interbank Financial Telecommunication
(SWIFT) in Belgium, which provides aproprietary network for
transmitting messages pertaining to financial transactions. SWIFT
transmits information among as many as 7,000institutions in 160
different countries and processes messages relating to an average
of $3 trillion per day. Two other key support organizationsbased
in Europe are Euroclear in Belgium and Cedel Bank in Luxembourg.
These organizations perform clearance and settlement services on
behalfof many internationally active financial institutions, with
Euroclear having about 2,200 participants in 70 countries and
Cedel Bank providing servicesto customers in 80 countries. Because
of the role they play in international finance, these
organizations' ability to successfully ready their systems forthe
date change in 2000 is important.

Officials from SWIFT, Euroclear, and Cedel Bank told us that they
hadcompleted most of their internal systems modifications and
testing by December 1998. These officials said that they have
testing programs underway with the financial institutions they
service. These organizations are also scheduled to participate in
a June 1999 global test of worldwidecentral banks and payment
systems that is being sponsored by the New York Clearing House
Association. This association operates an electronicpayments
system for international dollar payments.

Two organizations have taken the lead in addressing Year 2000
issues fromthe perspective of how these issues affect financial
institutions and markets internationally. The Global 2000
Coordinating Group is a privatesector organization comprising many
of the world's largest banks and securities firms and is leading
efforts to ensure the readiness of the globalfinancial system.
This group was formed in April 1998 with the mission of
identifying and providing resources to areas where coordinated
initiativeswould assist the financial community in improving its
readiness for the date change in 2000. As of January 1999, the
group had participants from244 institutions in 53 countries.

To assist financial institutions in addressing the Year 2000
problem, theGlobal 2000 Coordinating Group has encouraged its
members to selfdisclose the status of their readiness efforts and
has developed a templateto standardize the presentation of this
information. The group has also developed country assessments that
attempt to assess the level ofreadiness of the financial sector
and infrastructure providers such as

Major International MarketSupport Organizations Report
CompletingModifications for Year 2000

Two InternationalOrganizations Are Active in Ensuring the
Readiness ofGlobal Financial Markets and Institutions

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Page 18 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
telecommunications, power, water, and government. Although not
beingreleased publicly, these country assessments are being shared
with selected public and private sector officials in their
respective countries.The group has also published guidance on
contingency planning and is attempting to compile a comprehensive
list of testing activities beingconducted globally.

The Joint Year 2000 Council is the other organization actively
addressinginternational Year 2000 issues. The council was formed
in April 1998 and comprises senior representatives of the Basle
Committee on BankingSupervision, the Committee on Payment and
Settlement Systems, the International Association of Insurance
Supervisors, and the InternationalOrganization of Securities
Commissions. Currently, a member of the U.S. Federal Reserve Board
of Governors chairs the council. Other staff fromthe U.S. banking
regulators and SEC also participate in several of the activities
of the Joint 2000 Council and have also been active in
otherinternational forums on a variety of Year 2000 concerns.

The council's main goals have been to (1) share information on
Year 2000oversight strategies and approaches and contingency
planning and (2) serve as a focal point for other national and
international Year 2000remediation initiatives. The council has
issued various sets of guidance for financial regulators and
financial institutions, including papers on testingand procedures
for assessing financial institutions. In February 1999, the
council released a series of papers on contingency planning.
Although the financial sectors in the United States and the other
countrieswe contacted were actively addressing the Year 2000
problem, other issues will require continued attention from
financial regulators, financialinstitutions, and other
organizations as 2000 approaches. The readiness of infrastructure
providers--including telecommunications, power, water,and other
services--were a concern to financial institution officials with
whom we spoke. Other areas that financial regulators and
financialinstitutions said they are addressing that will require
continued efforts include (1) developing mechanisms for
coordinating between regulatorsand other organizations during the
date change period, (2) promoting additional Year 2000 readiness
disclosure by foreign organizations, and (3)developing strategies
for communicating the readiness status of the financial sector to
public. Lastly, financial institutions' experiences as
theyparticipate in the recent introduction of the new currency in
Europe and the results of various Year 2000 tests slated to occur
around the world in1999 will likely provide lessons learned and
indications of the prospects for a successful Year 2000
transition.

Various Issues RequireContinued Attention by the Financial
Industryand Other Organizations

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Page 19 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
The Year 2000 readiness status of infrastructure providers in
foreignmarkets, such as telecommunications firms and power
providers, is a major concern to the U.S. and foreign financial
institutions operatinginternationally that we contacted.
Regardless of their own readiness and contingency planning,
financial markets and the firms participating inthem will not
likely be able to continue operating after the date change unless
the various infrastructure providers are also ready. Regulatory
andfinancial institution officials in the countries we visited
expressed several concerns about the readiness of infrastructure
providers in their own andother countries.

First, officials indicated that they did not have adequate
information aboutthe readiness status of many infrastructure
providers in other countries. This lack of information contributed
to uncertainty about the readinessstatus of these providers. Many
of the officials we contacted said that the providers should make
more information publicly available to reduce thisuncertainty. The
Joint Year 2000 Council has attempted to address the
infrastructure readiness issue, noting in its October 1998
bulletin that thescarcity of information available from operators
of key infrastructure components has inhibited prudent planning by
users of these services.13The council also noted that in many
areas, no existing public sector body has been directed to require
action by providers or the oversight structureis too disjointed to
allow one authority to lead such an effort.

Another concern of financial market officials regarding
infrastructure isthat Year 2000 problems in one country's
infrastructure could create problems for other countries because
of cross-border linkages. In aSeptember 1998 report, the
Organization for Economic Cooperation and Development noted that,
along with international financial transactions,sectors such as
transport, telecommunications, power provision, and other
activities depend on cross-border interconnections that could
bevulnerable to Year 2000 breakdowns.

14 In addition, regulatory and financial

institution officials told us that they were concerned that
inadequateattention was being paid to cross-border dependencies
among

infrastructure providers. For instance, officials indicated that
someGerman power providers rely on natural gas from Russia, a
country that has already acknowledged lacking resources to address
Year 2000 issues.Officials expressed concerns that no organization
appears to have taken the lead to address this and other such
cross-border dependencies.
13Council Bulletin Issue Two, Joint Year 2000 Council (Basle,
Switzerland: Oct. 6, 1998).

14The Year 2000 Problem: Impacts and Actions, Organization for
Economic Cooperation and Development (Paris, France: Sept. 30,
1998).

Readiness of ForeignInfrastructure Is Important to the Financial
Sector

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Page 20 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
An official with the Global 2000 Coordinating Group noted
anotherexample of these dependencies, explaining that Swiss power
companies supply power to other countries during peak periods.
However, over 1,000power suppliers exist in Switzerland and
determining what actions these organizations have taken to ready
their systems for the date change hasbeen difficult. Because power
supplies are shared among neighboring countries, in December 1998,
the European Commission urged thatrelevant authorities in each
country closely monitor progress in this sector, exchange
information with their counterparts, and publicly disclose
suchinformation.

15 The commission also urged that such information be shared

about air, rail, maritime, and road transport sectors because it
also foundthat little cross-border coordination and information
exchange has

occurred in these areas. Various organizations are addressing
infrastructure issues withinindividual countries and
internationally. As we previously recommended,

16

the banking regulators have been meeting to develop contingency
plansaddressing domestic and international infrastructure issues.
According to

an OCC official, a Federal Financial Institutions Examination
Council(FFIEC)

17 working group on contingency planning meets monthly and has

various subgroups addressing specific issues including
internationalpayment systems and the readiness of major
institutions in key markets.

This official also told us that U.S. banking regulators obtain
informationfrom their counterparts in other countries on the
readiness of infrastructure providers in those countries and
emphasize to thesecounterparts the importance of having more
information publicly disclosed on the status of key infrastructure
sectors. In addition to the financial regulators' efforts, the
President's Council onYear 2000 Conversion has working groups
addressing issues relating to various infrastructure sectors in
the United States and has also takenactions related to cross-
border concerns. For example, national Year 2000 coordinators from
the United States and as many as 120 countriesdiscussed
infrastructure issues at a meeting held at the United Nations in
December 1998. Officials of the President's Council have also met
with
15Communication from the Commission: How the European Union is
Tackling the Year 2000 Computer

Problem, European Commission (Brussels, Belgium: Dec. 2, 1998).
16Year 2000 Computing Crisis: Federal Depository Institution
Regulators Are Making Progress, But Challenges Remain (GAO/T-AIMD-
98-305; Sept. 17, 1998). 17This body is an interagency forum for
the Federal Reserve, OCC, the Federal Deposit Insurance
Corporation, the National Credit Union Administration, and the
Office of Thrift Supervision andprescribes uniform principles,
standards, and report forms for these agencies.

B-281294 Page 21 GAO/GGD-99-62 Financial Institution and
Regulatory Efforts their counterparts in other countries to
discuss cross-border infrastructureissues. Internationally,
individual infrastructure sectors also have taken steps to address
Year 2000 issues. For example, the InternationalTelecommunications
Union has attempted to gather readiness information and coordinate
cross-border testing of telecommunications services. Other
important issues, including coordination, disclosure,
andcommunication issues, require attention by U.S. regulators,
financial institution officials, and others as the date change in
2000 approaches. Forexample, regulators and financial institution
officials with whom we spoke said that regulators will have to be
involved in creating a mechanism formanaging information
collection shortly before and immediately after the date change.
The Joint Year 2000 Council stated, in February 1999, that
theaccurate exchange of information in late 1999 and the beginning
of 2000 between the public, private, and financial market sectors
bothdomestically and across borders would be vital to a smooth
transition.

18 As

a result, the council encouraged financial market authorities to
establishcommunication channels that could be used before, during,
and after the

date change. The council also noted that authorities could
considerestablishing a centralized location for collecting and
exchanging information among financial regulators, other
authorities, and financialmarket participants. Such information
centers may be useful in coordinating contingency plans in the
event of disruptions and failures andmay reduce the information
demands on financial institutions, which would allow them to
concentrate their resources on fixing problems thatmay occur.

Some of the financial institution officials we contacted also
called for theestablishment of such a coordination mechanism.
These officials said that their main concern was the need for a
centralized mechanism for gatheringand disseminating accurate
information about events during the date change to avoid panic.
They suggested that government regulators act inthis capacity
because they generally have access to government counterparts in
other countries and could provide more complete andaccurate
information to the markets. For instance, a representative of one
financial institution told us it would be good to have some
organization inplace that could be contacted in the event
institutions were having difficulty with a telephone system in one
of the foreign markets in whichthey conduct business. A Federal
Reserve official noted that the U.S. banking regulators were
considering how to facilitate this type of
18Planning by Financial Market Authorities for Year 2000
Contingencies, Joint Year 2000 Council (Basle,

Switzerland: Feb. 1999).

Coordination, Disclosure,and Communication Are Among Issues
RequiringAttention as 2000 Approaches

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Page 22 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
communication and were discussing it as part of the contingency
planningefforts with other regulators and private-sector financial
officials. An OCC official explained that each of the banking
regulators was developing itsown plans for having coordination
mechanisms in place, and that eventually they plan to integrate
these efforts through the FFIECcontingency planning working group.
As part of this, the banking regulators were also developing a
list of contacts among the staff offinancial regulators in other
countries from whom information about the status of the date
change outside of the United States could be readilyobtained.

Another issue that should concern U.S. and foreign regulators
before 2000arrives involves the need for additional disclosure by
organizations in other countries of their Year 2000 readiness
status. Many of the financialinstitution officials we contacted
indicated that more information about readiness status should be
publicly disclosed by entities in other countries.Because of the
need to disclose information to other countries that have an
economic interest in their member nations, the European
Commissionnoted in a December 1998 report that member state
governments should accelerate or establish mechanisms for
coordinating and monitoring Year2000 readiness.

19 The commission also noted that it is better to have

information that problems exist and are being addressed than to
haveuncertainty created by a total lack of information. On January
29, 1999, the

Global 2000 Coordinating Group called for (1) financial firms to
redoubletheir efforts to disclose their Year 2000 readiness and
(2) governments to provide more detailed public disclosure of the
readiness of sectors that arecritical to the safe functioning of
the financial industry. Banking regulatory officials told us that,
whenever possible, they discuss with foreignregulatory
organizations the need for more public disclosure on the Year 2000
readiness status of financial and other organizations. An OCC
officialsaid that the December 1998 issuance by the Joint Year
2000 Council

20 on

information sharing, which encourages foreign regulatory and
otherorganizations to disclose more information, was an example of
how U.S.

regulators were supporting this issue. A final issue concerning
regulators before the Year 2000 date changeoccurs involves the
need to communicate accurate information about the readiness
status of the financial sectors to the public. In the December
19Communication From the Commission: How the European Union is
Tackling the Year 2000 Computer

Problem, European Commission (Brussels, Belgium: Dec. 2, 1998).
20Year 2000 Information Sharing and Disclosure, Joint Year 2000
Council (Basle, Switzerland: Dec. 1998).

B-281294 Page 23 GAO/GGD-99-62 Financial Institution and
Regulatory Efforts 1998 paper on information sharing, the Joint
Year 2000 Council stated thatfinancial market authorities should
set an example by implementing a comprehensive information-sharing
program that includes communicatingwith the general public. The
council noted that promoting and preserving public confidence
requires strategic coordination. It stated that financialmarket
authorities should develop communication plans to reinforce, as
appropriate, the public's confidence in the financial system. In
anadditional issuance in February 1999, the council stated that,
by providing periodic status reports on the readiness of the
financial sector, authoritiescould shape the perceptions and
expectations of the public and minimize irrational and potentially
destabilizing behavior.21 U.S. and foreign financial institution
and regulatory officials told us thatregulators and governments
would have to inform the public about the financial sectors' Year
2000 status. The U.S. regulatory officials wecontacted
acknowledged that this need existed, and that they intended to
address this issue in the future. Various upcoming events may
indicate the potential success of Year 2000remediation efforts.
Many industry and regulatory officials told us that the degree of
success experienced during the euro conversion would providesome
indication of how well financial institutions may be able to
manage the Year 2000 date change. Like the Year 2000 problem, the
euroconversion required financial institutions to identify,
modify, and test internal computer systems to ensure accurate
processing. According to U.S. banking officials, the euro
conversion in early January1999 was mostly successful. However,
they said some institutions did experience problems in processing
transactions. In addition, adequateinformation about firms'
operating status during the conversion was not always available.
In particular, these officials said that organizations
thatexperienced processing difficulties were reluctant to report
any problems they had during the conversion. Financial
institutions involved in theconversion had contracted with a
private-sector information provider to arrange for dedicated
display space on its proprietary network as a meansfor reporting
and sharing information about the status of the financial
institutions' operations. However, when problems began occurring,
theinstitutions involved did not report them using this network.
They noted that the failure to disseminate information about
problems beingexperienced by some institutions could have created
more serious

21Planning by Financial Market Authorities for Year 2000
Contingencies, Joint Year 2000 Council (Basle,

Switzerland: Feb. 1999).

Events in 1999 May Indicatethe Potential Success of Year 2000
Efforts ofFinancial Market Participants

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Page 24 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
problems. However, many firms continued transmitting their
portions ofpayments due despite a lack of information about the
operating status of other institutions or assurance that they
would receive the correspondingpayments from other institutions.

A U.S. banking official said that, although the institutions
involved handledthe problems that did arise during the euro
conversion, the problems could have been more serious if the U.S.
institutions had not continued to maketheir payments when problems
arose. A U.S. banking regulatory official said that the regulators
and financial institutions should take action todecrease the
likelihood that similar information-sharing problems will occur
during the Year 2000 date change. The results of testing by
markets and institutions around the world in earlyto mid-1999
should provide another indicator of the international financial
markets' Year 2000 readiness. Many major markets are to conduct
tests oftheir Year 2000 readiness in 1999 and several tests
involving multiple firms are also to be conducted, including the
U.S. securities industrywide testthat began in March 1999 and a
global payments system test planned for June 1999. If successful,
these tests should provide more assurances thatfinancial markets
and financial institutions will be ready for the actual date
change in 2000. Although industrywide testing can demonstrate
thecoordinated and smooth functioning of U.S. financial markets,
some officials cautioned that the results of tests such as these
should not beconsidered definitive proof that participating
financial institutions are completely ready for 2000. Large
financial institutions may participate in awide variety of
financial activities, and all of their systems would not
necessarily be tested in any one industrywide test. For example,
officialsof two organizations, which conduct a wide range of
financial activities in the United States and other countries,
said that less than 10 percent oftheir total systems were used
during the U.S. securities industry test in July 1998. We obtained
oral comments on a draft of this report from staff of theBoard of
Governors of the Federal Reserve System and SEC and written
comments from OCC (see app. I). Each of the agencies that
commented onthis report said that it was an accurate summary of
the activities that their organizations and the financial
institutions they oversee are undertaking toaddress international
Year 2000 risks. They also agreed that the issues we highlighted
as requiring their continued attention were important.
OCC'swritten comments are reprinted in appendix I. SEC staff also
suggested some technical changes that we incorporated where
appropriate.

Agency Comments andOur Evaluation

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Page 25 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
As agreed with your office, unless you publicly announce its
contentsearlier, we plan no further distribution of this report
until 10 days from its issue date. At that time, we will send
copies of this report toRepresentative Thomas Bliley, Chairman,
House Committee on Commerce; Senator Robert F. Bennett, Chairman,
Senate SpecialCommittee on the Year 2000 Technology Problem; The
Honorable Arthur Levitt, Chairman, Securities and Exchange
Commission; The HonorableAlan Greenspan, Chairman, Board of
Governors of the Federal Reserve System; and The Honorable John D.
Hawke, Jr., Comptroller of theCurrency, Office of the Comptroller
of the Currency. We will also make copies available to others upon
request. Please contact me on (202) 512-8678 if you or your staff
have anyquestions. Major contributors to this report are listed in
appendix II.

Sincerely yours,

Richard J. HillmanAssociate Director, Financial  Institutions and
Markets Issues

Page 26 GAO/GGD-99-62 Financial Institution and Regulatory Efforts

Contents

1Letter 28Appendix I Comments From theOffice of the

Comptroller of theCurrency

30Appendix II Major Contributors toThis Report

Table 1: Top 10 Foreign Country Lending Exposures forU.S. Banks as
of June 30, 1998 6 Table 2: Top 10 Foreign Country U.S. Mutual
Fund EquityInvestments as of January 1999 7 Tables

Abbreviations FFIEC Federal Financial Institutions Examination
Council OCC Office of the Comptroller of the Currency SEC
Securities and Exchange Commission SWIFT Society for Worldwide
Interbank Financial Telecommunication

Page 27 GAO/GGD-99-62 Financial Institution and Regulatory Efforts

Appendix IComments From the Office of the Comptroller of the
Currency

Page 28 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
Appendix I Comments From the Office of the Comptroller of the
Currency

Page 29 GAO/GGD-99-62 Financial Institution and Regulatory Efforts
Appendix IIMajor Contributors to This Report

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Michael Burnett, Assistant DirectorCody Goebel, Assistant Director
Jean Paul Reveyoso, Senior EvaluatorGeneral GovernmentDivision

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