-------------------------Indexing Terms------------------------- 
REPORTNUM:   T-AIMD-98-305		

TITLE:     Year 2000 Computing Crisis: Federal Depository Institution 
Regulators Are Making Progress, But Challenges Remain

DATE:   09/17/1998
				                                                                         
-----------------------------------------------------------------

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Cover
================================================================ COVER


Before the Committee on Banking and Financial Services, House of
Representatives

For Release on Delivery
Expected at
10 a.m.
Thursday,
September 17, 1998

YEAR 2000 COMPUTING CRISIS -
FEDERAL DEPOSITORY INSTITUTION
REGULATORS ARE MAKING PROGRESS,
BUT CHALLENGES REMAIN

Statement of Jack L.  Brock, Jr.,
Director, Governmentwide and Defense Information Systems
Accounting and Information Management Division

GAO/T-AIMD-98-305

GAO/AIMD-98-305T


(511120)


Abbreviations
=============================================================== ABBREV

  ATM - x
  FDIC - x
  FFIEC - x
  FRS - x
  NCUA - x
  NERC - x
  OCC - x
  OTS - x

============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

I am pleased to be here to discuss the progress of the federal
regulatory agencies in ensuring that the thousands of financial
institutions\1 they oversee are ready for the upcoming century date
change.  As you know, banks, thrifts, and credit unions are extremely
vulnerable to Year 2000 problems due to their widespread dependence
on computer systems to make loans, invest deposits, transfer funds,
issue credit cards, and handle routine business functions, such as
accounting and personnel management.  At the very least, Year 2000
problems\2 could cause significant inconveniences to financial
institutions and their customers.  More significantly, system
failures could lead to closings and serious disruptions to payment
systems and credit flows.  Today, I will discuss the Year 2000 risks
facing financial institutions and the federal regulators, highlight
actions taken to date to mitigate these risks, and address the
challenges ahead as institutions and regulators face the more complex
and difficult activities of their Year 2000 programs. 

This testimony is one in a series of reports and testimonies that we
have issued at this Committee's request on the status of efforts by
the five federal financial regulatory agencies to ensure that the
institutions they oversee are ready to handle the Year 2000 computer
conversion challenge.  We previously reported on the status of the
National Credit Union Administration (NCUA), the Federal Deposit
Insurance Corporation (FDIC), and the Office of Thrift Supervision
(OTS).\3 Today, we are also reporting on the Federal Reserve System's
(FRS) efforts to oversee the Year 2000 progress of the institutions
it supervises.\4 This statement incorporates the results of that
review as well as our recently completed review of the Office of the
Comptroller of the Currency (OCC).  We plan to conclude this series
with a report on the FRS' internal system conversion efforts in the
coming months.  Therefore, my statement today excludes any discussion
of that ongoing review. 

To prepare for this testimony, we evaluated regulator efforts to date
to ensure that the institutions they oversee are adequately
mitigating the risks associated with the Year 2000 date change.  We
compared their efforts to criteria detailed in our Year 2000
Assessment Guide,\5 Business Continuity and Contingency Planning
Guide,\6 and Testing Guide\7 as well as Year 2000 examination
guidance and procedures set forth by the Federal Financial
Institutions Examination Council (FFIEC).\8 We reviewed procedures
and guidance developed by the regulators to perform their industry
assessments.  We also reviewed regulator reports to the Congress on
the status of their efforts to correct internal systems and to
oversee financial institution Year 2000 readiness.  We reviewed
relevant correspondence from the regulators to their examiners and
the institutions they supervise and interviewed officials responsible
for overseeing the safety and soundness of financial institution
management practices and procedures.  We also interviewed officials
from various trade associations representing banks, thrifts, and
credit unions to obtain their views on the adequacy of regulatory
efforts and determine what the bank, thrift, and credit union
communities were doing to ensure Year 2000 readiness.  Information on
Year 2000 readiness of internal regulator systems and the status of
institutions was provided by the regulators and was not independently
verified by us.  Our work was performed at the regulators between
October 1997 and September 1998 in accordance with generally accepted
government auditing standards. 

In summary, we found that the regulators have made good progress in
assisting banks, thrifts, and credit unions in their Year 2000
efforts as well as identifying which institutions are at a high risk
of not remediating their systems on time.  They have also recognized
the risk and potential impact of Year 2000-induced system failures on
their own core business processes and have implemented rigorous
efforts to mitigate these risks. 

Nevertheless, there are still serious challenges ahead that could
threaten the financial institution industry's ability to successfully
meet the Year 2000 deadline. 

  -- First, there is the challenge of time.  With less than 16 months
     remaining before the Year 2000 deadline, the regulators are
     faced with the daunting task of overseeing the efforts of more
     than 22,000 financial institutions, service providers, and
     software vendors with a relatively finite number of examination
     personnel. 

  -- Second, in the next few months, many of these entities will be
     undertaking the most complex and difficult stage of
     correction--testing.  It will be necessary for regulators to
     ensure that they have enough technical resources to review
     institution efforts during this crucial phase. 

  -- Third, beginning in early 1999, regulators will be pressed to
     take quick actions against institutions that cannot successfully
     complete their Year 2000 efforts.  But before they can do so,
     they need to determine what will constitute financial
     institution Year 2000 failures, what regulatory options can be
     effectively used, and when they would be implemented. 

  -- Fourth, the U.S.  economy is intrinsically linked to the
     international banking and financial services sector, yet many
     countries and their financial institutions are reported to be
     behind schedule in addressing their Year 2000 problem.  Working
     with their foreign counterparts, the regulators will need to
     identify and define global Year 2000 risks and work
     cooperatively to mitigate those risks.  The regulators will also
     need to develop contingency plans in case there are unforeseen
     problems. 

  -- Fifth, financial institution credit, deposit, and payment flows
     are critically dependent on public infrastructure, such as
     telecommunications and electric power networks; however, until
     critical readiness assessments and tests are completed and made
     available to the public, it is not clear whether there will be
     uninterrupted telecommunications and power service.  Again,
     regulators will need to develop contingency plans that
     anticipate Year 2000-related disruptions in the public
     infrastructure. 


--------------------
\1 In this report, financial institutions refers to commercial banks,
thrifts, and credit unions. 

\2 The Year 2000 problem is rooted in the way dates are recorded and
computed in automated information systems.  For the past several
decades, systems have typically used two digits to represent the
year, such as "97" representing 1997, in order to conserve electronic
data storage and reduce operating costs.  With this two-digit format,
however, the year 2000 is indistinguishable from 1900, or 2001 from
1901.  As a result of this ambiguity, system or application programs
that use dates to perform calculations, comparisons, or sorting may
generate incorrect results. 

\3 Year 2000 Computing Crisis:  National Credit Union
Administration's Efforts to Ensure Credit Union Systems Are Year 2000
Compliant (GAO/T-AIMD-98-20, October 22, 1997); Year 2000 Computing
Crisis:  Actions Needed to Address Credit Union Systems' Year 2000
Problem (GAO/AIMD-98-48, January 7, 1998); Year 2000 Computing
Crisis:  Federal Deposit Insurance Corporation's Efforts to Ensure
Bank Systems Are Year 2000 Compliant (GAO/T-AIMD-98-73, February 10,
1998); Year 2000 Computing Crisis:  Office of Thrift Supervision's
Efforts to Ensure Thrift Systems Are Year 2000 Compliant
(GAO/T-AIMD-98-102, March 18, 1998); FDIC's Year 2000 Preparedness
(GAO/AIMD-98-108R, March 18, 1998); and Year 2000 Computing Crisis: 
Federal Regulatory Efforts to Ensure Financial Institution Systems
Are Year 2000 Compliant (GAO/T-AIMD-98-116, March 24, 1998). 

\4 Year 2000 Computing Crisis:  Federal Reserve Is Acting to Ensure
Financial Institutions Are Fixing Systems, But Challenges Remain
(GAO/AIMD-98-248, September 17, 1998). 

\5 Year 2000 Computing Crisis:  An Assessment Guide
(GAO/AIMD-10.1.14).  Published as an exposure draft in February 1997
and finalized in September 1997, the guide was issued to help federal
agencies prepare for the Year 2000 conversion.  It advocates a
structured approach to planning and managing an effective Year 2000
program through five phases:  (1) raising awareness of the problem,
(2) assessing the extent and severity of the problem and identifying
and prioritizing remediation efforts, (3) renovating, or correcting,
systems, (4) validating, or testing, corrections, and (5)
implementing corrected systems. 

\6 Year 2000 Computing Crisis:  Business Continuity and Contingency
Planning (GAO/AIMD-10.1.19).  Published as an exposure draft in March
1998 and finalized in August 1998, this guide provides a conceptual
framework for helping organizations to manage the risk of potential
Year 2000-induced disruptions to their operations.  It discusses the
scope and challenge and offers a structured approach for reviewing
the adequacy of agency Year 2000 business continuity and contingency
planning efforts. 

\7 Year 2000 Computing Crisis:  A Testing Guide (GAO/AIMD-10.1.21,
Exposure Draft, June 1998).  This guide addresses the need to plan
and conduct Year 2000 tests in a structured and disciplined fashion. 
The guide describes a step-by-step framework for managing, and a
checklist for assessing, all Year 2000 testing activities, including
those activities associated with computer systems or system
components (such as embedded processors) that are vendor supported. 

\8 FFIEC was established in 1979 as a formal interagency body
empowered to prescribe uniform principles, standards, and report
forms for the federal examination of financial institutions, and to
make recommendations to promote uniformity in the supervision of
these institutions.  The Council's membership is composed of the
federal financial institution regulators--FDIC, FRS, OCC, OTS, and
NCUA. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

The federal financial regulators are responsible for examining and
monitoring the safety and soundness of approximately 22,000 financial
institutions, which, together, manage more than $13 trillion in
assets and hold over $7 trillion in deposits.  Specifically: 

  -- The Federal Reserve System is responsible for overseeing the
     Year 2000 activities of 1,618 entities, including 990 state
     member banks, 349 bank holding companies, 221 foreign bank
     offices, and 9 Edge Act corporations.\9 According to FRS, these
     organizations have assets totaling over $7.7 trillion and hold
     deposits of about $3.6 trillion.  FRS' oversight
     responsibilities also include 49 service providers, software
     vendors, and data centers. 

  -- The Office of the Comptroller of the Currency supervises about
     2,600 federally-chartered, national banks and federal branches
     and agencies of foreign banks, which comprise about $3.5
     trillion in assets.  OCC is also responsible for monitoring the
     Year 2000 activities of 109 service providers, software vendors,
     and data centers. 

  -- The Federal Deposit Insurance Corporation supervises about 6,000
     state-chartered, nonmember banks, which are responsible for
     about $1 trillion in assets.  It is also the deposit insurer of
     approximately 11,000 banks and savings institutions that have
     insured deposits totaling upwards of $3.8 trillion.  FDIC also
     oversees 146 service providers, software vendors, and data
     centers. 

  -- The Office of Thrift Supervision oversees about 1,200 savings
     and loan associations (thrifts), which primarily emphasize
     residential mortgage lending and are an important source of
     housing credit.  These institutions hold approximately $737
     billion in assets. 

  -- The National Credit Union Administration supervises about 7,000
     federally-chartered credit unions.  It is also the deposit
     insurer of more than 11,000 federally- and state-chartered
     credit unions whose assets total about $371 billion.  Credit
     unions are nonprofit financial cooperatives organized to provide
     their members with low-cost financial services. 

As part of their goal of maintaining safety and soundness, these
regulators are responsible for assessing whether the institutions
they supervise are adequately mitigating the risks associated with
the century date change.  To ensure consistent and uniform
supervision on the Year 2000 issue, the five regulators are
coordinating their supervisory efforts through FFIEC.  Additionally,
under the auspices of the FFIEC, the regulators are jointly examining
28 major data service providers and software vendors that support the
financial institutions.  Each of the regulators, except NCUA, is
responsible for a specified number of these joint examinations. 


--------------------
\9 Edge Act corporations are corporations chartered by FRS to engage
in international banking.  The Board of Governors of FRS reviews and
approves the applications to establish Edge Act corporations and also
has supervisory responsibility for examining the corporations and
their subsidiaries. 


   YEAR 2000 RISKS CONFRONTING
   FINANCIAL INSTITUTIONS AND
   REGULATORS
---------------------------------------------------------- Chapter 0:2

Addressing the Year 2000 problem in time has been, and will continue
to be, a tremendous challenge for financial institutions and their
regulators.  Virtually every insured financial institution relies on
computers--either their own or those of a contractor--to process and
update records and for a variety of other functions.  To complicate
matters, most institutions have computer systems that interface with
systems belonging to payment systems partners, such as wire transfer
systems, automated clearinghouses, check clearing providers, credit
card merchant and issuing systems, automated teller machine (ATM)
networks, electronic data interchange systems, and electronic
benefits transfer systems.  Because of these interdependencies,
financial institutions systems are also vulnerable to failure caused
by incorrectly formatted data provided by other systems that are not
Year 2000 compliant. 

In addition, financial institutions depend on public infrastructure,
such as telecommunications and power networks, to carry out critical
business operations, such as making electronic fund transfers,
verifying credit card transactions, and making ATM transactions. 
However, these networks are also susceptible to Year 2000 problems. 
Thus, financial institutions must also assess the Year 2000 readiness
efforts of their local utilities and telecommunications providers. 

Financial institutions and their regulators cannot afford to neglect
any of these issues.  If they do, the impact of Year 2000 failures
could be potentially disruptive to vital bank operations and harmful
to customers.  For example, loan systems could make errors in
calculating interest and amortization schedules.  In turn, these
miscalculations may expose institutions and data centers to financial
liability and loss of customer confidence.  Moreover, ATMs may
malfunction, performing erroneous transactions or refusing to process
transactions.  Other supporting systems critical to the day-to-day
business of financial institutions may be affected as well.  For
example, telephone systems, vaults, and security and alarm systems
could malfunction. 


   REGULATORS HAVE TAKEN POSITIVE
   ACTIONS TO MITIGATE YEAR 2000
   RISKS
---------------------------------------------------------- Chapter 0:3

Since June 1996, when their Year 2000 oversight efforts began, the
five financial institution regulators have taken a number of
important steps to alert financial institutions of the risks
associated with the Year 2000 problem and to assess what these
institutions are doing to mitigate the risks.  To raise awareness,
the regulators issued letters to financial institutions that
described the Year 2000 problem and special risks facing financial
institutions and recommended approaches to planning and managing
effective Year 2000 programs.  In addition, the regulators provided
extensive guidance to assist financial institutions in critical Year
2000 tasks, including guidance on (1) contingency planning, (2)
mitigating risks associated with critical bank customers (e.g., large
borrowers and capital providers), (3) mitigating risks of using data
processing servicers and software vendors to perform financial
institution operations, (4) testing to demonstrate Year 2000
compliance, (5) establishing effective Year 2000 customer awareness
programs, and (6) addressing Year 2000 risks associated with
fiduciary services.  The regulators have also undertaken extensive
outreach efforts--such as establishing Internet sites and conducting
seminars nationwide--to raise the Year 2000 awareness of banking
industry personnel and the public. 

To assess what institutions are doing to mitigate Year 2000 risks,
the regulators performed a high-level and detailed assessment of
bank, thrift, and credit union efforts.  The high-level assessment
consisted primarily of administering FFIEC's Year 2000 questionnaire
via telephone and on-site visits and was completed during November
and December 1997.  During this assessment, the regulators examined
whether institutions had established a structured process for
correcting the problem; estimated the costs of remediation;
prioritized systems for correction; and determined the Year 2000
impact on other internal systems important to day-to-day operations,
such as vaults, security and alarm systems, elevators, and
telephones.  The more detailed Year 2000 assessment involved on-site
visits to the institutions and was completed in June 1998.  These
examinations focused on whether institutions were appropriately
planning for the Year 2000 effort and addressing risks posed by
service providers, software vendors, and large customers.  They also
began to assess whether institutions had effective customer awareness
programs. 

These exams found the majority of financial institutions are doing an
adequate job in addressing the Year 2000 issue.  Specifically,
according to the regulators, they found that of the over 22,000
institutions with examinations completed by June 30, 1998, almost 93
percent were doing a satisfactory job of addressing their Year 2000
problems, about 7 percent needed improvement, and 0.3 percent were
performing unsatisfactorily. 

The regulators plan to follow up with additional on-site visits that
will address the unique--and more difficult--challenges that the
testing and implementation phases will present.  These exams, which
the regulators plan to complete by March 31, 1999, are expected to
identify institutions that are experiencing difficulties completing
their testing and implementation programs or have not developed
sufficient contingency plans. 


   REGULATORS HAVE ALSO TAKEN
   POSITIVE STEPS TO REMEDIATE
   INTERNAL SYSTEMS
---------------------------------------------------------- Chapter 0:4

In addition to overseeing the efforts of financial institutions to
address the Year 2000 problem, the federal regulators must also
ensure that their internal computer systems are Year 2000 compliant. 
This is especially critical for FRS which operates systems on which
the financial institutions heavily rely.  For example, according to
FRS, the Fedwire system was used by financial institutions in 1997 to
make about 89 million funds transfers valued at $288 trillion.  While
systems belonging to the other regulators are not critical to the
day-to-day operation of the banking industry, they support the
essential business functions of the regulators, such as personnel
management, accounting, budget, travel, and program tracking. 

As noted earlier, we are currently reviewing FRS' efforts to
remediate its internal systems and plan to report the results of our
review separately.  However, we have reviewed the efforts of the four
other regulators to remediate their systems and found that they have
taken many actions that are crucial to successfully dealing with the
Year 2000 problem.  For example, they have established a good
foundation for managing their remediation efforts by developing Year
2000 strategies, designating Year 2000 program managers, inventorying
systems, and developing tracking systems to monitor progress and
prepare status reports.  They are acting or have acted to ensure that
core business operations are not disrupted by identifying core
business operations, assessing the potential impact of Year
2000-induced failures (including public infrastructure failures) on
those operations, prioritizing conversion efforts, and developing
contingency plans.  The regulators also have identified their data
exchanges and are working with their data exchange partners to
prevent noncompliant systems from introducing Year 2000 errors into
compliant systems.  Finally, to ensure that their systems are
adequately tested, the regulators have developed Year 2000 testing
guidance and have begun or are well underway in testing their
systems. 

In September 1998, each of the regulators reported to the Congress
that they are on schedule to meet the Office of Management and
Budget's March 1999 implementation date for their mission-critical
systems.  Their data indicate that, with continued good management,
the regulators should be able to meet this milestone. 


   REGULATORS HAVE RESPONDED
   QUICKLY TO GAO FINDINGS AND
   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

While the regulators have been working hard to achieve industrywide
compliance and remediate their own systems, we have identified
concerns and problems with their efforts during the course of our
reviews.  Specifically, we found that all the regulators were late in
initiating their Year 2000 oversight of institutions and in issuing
key guidance on business continuity and contingency planning,
corporate borrowers, and service providers and software vendors.  We
also found that the regulators had not assessed whether they had
enough information system examiners to adequately oversee the Year
2000 efforts of the institutions they supervise.  In addition to
these general concerns, we also found problems specific to each
agency. 

However, the regulators have been quick to respond to our
recommendations and to implement corrective actions.  For example, in
October 1997, we made recommendations to NCUA to help it ensure that
credit unions were adequately mitigating Year 2000 risks.  Among
other things, NCUA responded by (1) implementing a quarterly
reporting process whereby credit unions would communicate the status
of their remediation efforts between examinations, (2) developing a
formal, detailed plan for contingencies, (3) instructing credit union
management to have their auditors address Year 2000 issues in the
scope of their work, and (4) hiring additional contractor support to
assist with exams of credit unions and service providers.  We also
made specific recommendations to FDIC to (1) work with the other
FFIEC members to enhance the content of their assessment work
program, (2) ensure that adequate resources are allocated to complete
the corporation's internal systems' assessment by the end of March
1998, and (3) develop contingency plans for each of FDIC's
mission-critical systems and core business processes.  Similarly, we
recommended that OTS develop contingency plans for each of its
mission-critical systems and core business processes.  Again, both
agencies agreed with our recommendations and took immediate steps to
implement them. 


   SIGNIFICANT YEAR 2000
   CHALLENGES AHEAD FOR FINANCIAL
   INSTITUTIONS AND REGULATORS
---------------------------------------------------------- Chapter 0:6

Despite the regulators' strong efforts to assess industrywide
compliance and remediate their own systems, several complex and
difficult challenges remain in achieving Year 2000 compliance. 

First:  the challenge of time.  Regardless of good practices and good
progress, less than 16 months remain to the century date change. 
With over 22,000 institutions, vendors, and service providers to
examine and monitor, the regulators face a formidable task in
continuing to provide adequate coverage. 

Second:  the challenge to provide effective oversight during the
later and more complicated stages of the remediation effort.  By
December 1998, FFIEC expects financial institutions to be well into
the testing phase.  As noted in our Year 2000 Test Guide, because
Year 2000 conversions often involve numerous, large interconnecting
systems with many external interfaces and extensive supporting
technology infrastructures, testing needs to be approached in a
structured and disciplined fashion.  According to OCC, for many
banks, testing will consume upwards of 60 percent of the cost and
time spent to correct Year 2000 problems.  Nevertheless, the
regulators have a small window of opportunity for assessing
institutions during this critical phase:  they generally expect to
complete on-site exams of service providers, software vendors, and
institutions with in-house or complex systems by December 31, 1998,
and plan to complete on-site exams for the remaining institutions by
March 31, 1999.  At the same time, however, they have a limited
number of technical examiners to conduct these reviews.  OCC, for
example, has 79 full-time bank information system examiners
responsible for providing assistance to 575 safety and soundness
examiners and for examining institutions with complex systems.  FRS
currently has 73 such examiners--31 full time and 42 part time--that
conduct complex examinations while supporting 106 other examiners
during their exams.  Because of the limited number of technical
examiners and the large number of entities to be examined, we have
recommended to the regulators that they (1) determine how many
technical examiners are needed to adequately oversee the Year 2000
efforts of the institutions, data processing servicers, and software
vendors and (2) develop a strategy for obtaining these resources and
maintaining their availability. 

Third:  the challenge to develop an effective strategy for dealing
with institutions that by all indications will not be viable by the
Year 2000.  The regulators have not yet (1) defined the criteria for
finding that a financial institution will not be viable due to Year
2000 problems or (2) developed a strategy for when and how they will
handle such troubled institutions.  The regulators have been working
on these issues.  For example, they are querying data centers and
service providers on their capacity to service new clients due to
Year 2000 problems and putting together a "bidders list" for Year
2000 purposes that will include institutions that have demonstrated,
well-managed Year 2000 programs and are capable of processing
acquisitions of other institutions.  However, none of these efforts
have been finalized.  Developing these plans promptly is paramount to
minimizing the risk of not having enough time to implement a viable
plan for dealing with institutions that cannot successfully complete
their efforts. 

Fourth:  the challenge to protect U.S.  banks from international Year
2000 risks.  U.S.  banks have many external links to financial
institutions and markets around the world.  For example, overseas
financial institutions and markets depend on our electronic funds
transfer systems and clearinghouses.  Unfortunately, it has been
reported that many countries are well behind their U.S.  counterparts
in Year 2000 remediation.  For example, a survey of 15,000 companies
in 87 countries by the Gartner Group found that nations including
Germany, India, Japan, and Russia were 12 months or more behind the
United States.\10 Given the fact that many countries are behind
schedule in addressing the Year 2000 problem, it will be essential
for regulators to (1) ensure that financial institutions have
adequately identified and mitigated their international risks and (2)
prepare contingency plans for handling disruptions caused by problems
abroad. 

Fifth:  the challenge to protect financial institutions from Year
2000 disruptions caused by their telecommunications and power service
providers.  The most vital business operations of financial
institutions--ATM transactions, fund transfers, and credit card
authorizations, for example--are dependent on telecommunications and
power networks.  In fact, according to the President's National
Security Telecommunications Advisory Committee, the financial
services industry may be the telecommunications industry's most
demanding customer:  over $2 trillion is sent by international wire
transfers every day. 

In June 1998 testimony on the Year 2000 readiness of the
telecommunications sector, we reported that most major
telecommunications carriers expect to achieve Year 2000 network
compliance by December 1998.  For a few though, the planned date for
compliance is either later than December 1998, or we were unable to
obtain this information.\11 The carriers are working to test their
networks but until the tests are completed and the results made
public, it is not clear to what degree--if any--financial
institutions and the public will be subject to telecommunications
disruptions. 

The situation for electric power companies is similar.  At the
request of the Department of Energy, the North American Electric
Reliability Council (NERC) is assessing the readiness of the critical
systems within the nation's electric infrastructure.  The Secretary
of Energy requested that NERC provide written assurances by July 1,
1999, that critical power systems have been tested, and that such
systems will be ready to operate in the year 2000.  Until such
assessments are completed and results made public, the precise status
of this sector is not completely clear.  Because of the uncertain
nature of electric power and telecommunications Year 2000 readiness,
it is essential for regulators and institutions to plan for
contingencies should there be service disruptions due to the Year
2000 date change. 


--------------------
\10 Year 2000 World Status 2Q98 Update - A Summary Report (Gartner
Group, Report #M-04-6957, July 21, 1998). 

\11 Year 2000 Computing Crisis:  Telecommunications Readiness
Critical, Yet Overall Status Largely Unknown (GAO/T-AIMD-98-212,
June, 16, 1998). 


-------------------------------------------------------- Chapter 0:6.1

In conclusion, the regulators have made significant progress in
assessing the readiness of member institutions; raising awareness on
important issues such as contingency planning, testing, and dealing
with service providers, software vendors, and large customers; and
remediating their own systems.  Looking forward, the challenge is for
the regulators to make the best use of limited resources in the time
remaining and to ensure that they are ready to take swift actions to
address those institutions that falter in the later phases of
correction and to address disruptions caused by international and
public infrastructure Year 2000 failures.  To their credit, the
regulators have spent the last year developing a picture of how their
industry stands, including which institutions are at high risk of not
being ready for the millennium and require immediate attention, which
service providers and vendors are likely to be problematic, and the
extent of problems remaining.  In addition, they have undertaken
efforts to determine what conditions will constitute Year 2000
failures and what actions can be taken to quickly address failures. 
Nevertheless, more needs to be done to prepare for major potential
disruptions caused by domestic and international financial
institutions, as well as power and telecommunications companies,
experiencing processing problems at the century date rollover. 

Accordingly, we are now recommending that the regulators, working
through the FFIEC, (1) finalize by December 1, 1998, their plans for
dealing with institutions that will be not be viable due to Year 2000
problems and (2) develop contingency plans that address international
and public infrastructure Year 2000 risks. 

Mr.  Chairman, this concludes my statement.  We welcome any questions
that you or Members of the Committee may have. 


*** End of document. ***