Year 2000 Computing Crisis: Federal Deposit Insurance Corporation's
Efforts to Ensure Bank Systems Are Year 2000 Compliant (Testimony,
02/10/98, GAO/T-AIMD-98-73).

Pursuant to a congressional request, GAO discussed the progress being
made by the Federal Deposit Insurance Corporation (FDIC) in ensuring
that the thousands of banks it oversees are ready for the upcoming year
2000.

GAO noted that: (1) the year 2000 problem poses a serious dilemma for
banks due to their heavy reliance on information systems; (2) it also
poses a challenge for FDIC and the other bank regulators who are
responsible for ensuring bank industry readiness; (3) regulators have a
monumental task in making sure that financial institutions have adequate
guidance in preparing for the year 2000 and in providing a level of
assurance that such guidance is being followed; (4) further, regulators
will likely face some tough decisions on the readiness of individual
institutions as the millennium approaches; (5) GAO found that FDIC is
taking the problem very seriously and is devoting considerable effort
and resources to ensure that the banks it oversees mitigate year 2000
risks; (6) the Corporation has been very emphatic in alerting banks to
the year 2000 problem and has conducted a high-level assessment of the
industry's year 2000 readiness; (7) despite aggressive efforts, FDIC
still faces significant challenges in providing a high level of
assurance that individual banks will be ready; (8) FDIC--as were the
other regulators--was late in addressing the problem; (9) consequently,
it is behind the year 2000 schedule recommended by both GAO and the
Office of Management and Budget (OMB); (10) compounding this problem is
that critical guidance, although under development, has not been
released by the Federal Financial Institutions Examination Council
(FFIEC) for banks and other financial institutions on contingency
planning, assessing risks caused by corporate customers (borrowers), and
assessing risks associated with third-party automated system service
providers; (11) this guidance should have been provided earlier so that
banks would have had more time to factor the guidance into their own
assessments and plans; (12) additionally, FDIC's ability to report on
individual bank's status in preparing for the year 2000 is limited by
insufficient information being reported by bank examiners; (13) FDIC
also needs to correct its internal systems used to support agency
functions and has initiated efforts to do this; (14) FDIC is behind in
assessing whether these systems are year 2000 compliant; and (15)
although OMB guidance states that the assessment phase should have been
completed in mid-1997, FDIC has not yet fully assessed its mission
critical systems or established contingency plans in case systems
repairs and replacements are not in place on time or do not work as
intended.

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

 REPORTNUM:  T-AIMD-98-73
     TITLE:  Year 2000 Computing Crisis: Federal Deposit Insurance 
             Corporation's Efforts to Ensure Bank Systems Are Year
             2000 Compliant
      DATE:  02/10/98
   SUBJECT:  Information systems
             Strategic information systems planning
             Insured commercial banks
             Systems conversions
             Systems compatibility
             Bank examination
             Regulatory agencies
             Internal controls
             Data integrity
             Information resources management
IDENTIFIER:  FDIC Year 2000 Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Financial Services and Technology,
Committee on Banking, Housing, and Urban Affairs, U.S.  Senate

For Release on Delivery
Expected at
10 a.m.
Tuesday,
February 10, 1998

YEAR 2000 COMPUTING CRISIS -
FEDERAL DEPOSIT INSURANCE
CORPORATION'S EFFORTS TO ENSURE
BANK SYSTEMS ARE YEAR 2000
COMPLIANT

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

GAO/T-AIMD-98-73

GAO/AIMD-98-73T


(511113)


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

  FDIC - Federal Deposit Insurance Corporation
  FFIEC - Federal Financial Institutions Examination Council
  OMB - Office of Management and Budget

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

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here to discuss the progress being made by the
Federal Deposit Insurance Corporation (FDIC) in ensuring that the
thousands of banks it oversees are ready for the upcoming century
date change.  If Year 2000 issues are not adequately addressed, key
automated bank systems--affecting trillions of dollars in assets,
transactions, and insured deposits--are subject to serious
consequences ranging from malfunction to failure.  Such consequences
would at the very least cause significant inconveniences to both
banks and their customers.  More significantly, system failure could
lead to bank closings and serious disruptions to both the banking
community and bank customers.  Further, we will be discussing the
progress FDIC is making in addressing Year 2000 concerns for its own
internal systems. 

This testimony is the second in a series of reports you requested on
the status of efforts by federal financial regulatory agencies to
ensure that the institutions they oversee are ready to handle the
Year 2000 computer conversion challenge.  We also recently testified
and reported on the status of the National Credit Union
Administration's efforts.\1

To prepare for this testimony, we evaluated FDIC's efforts to date to
ensure that the banks it oversees have adequately mitigated the risks
associated with the Year 2000 date change and compared these efforts
to criteria detailed in our Year 2000 Assessment Guide.\2 In
performing the overview, we reviewed Year 2000 examination policies,
procedures, and guidance.  We also reviewed FDIC correspondence to
banks and third-party contractors (that provide automated systems
services and software to many financial institutions) regarding the
Year 2000 problem.  Furthermore, we interviewed FDIC officials
responsible for examining and overseeing the safety and soundness of
bank management practices and procedures.  Finally, we interviewed
officials from the American Bankers Association and the Independent
Bankers Association of America. 

We also compared FDIC efforts to fix its internal systems with our
guide.  To accomplish this, we reviewed the corporation's project
plan and other Year 2000 documentation and interviewed officials
responsible for fixing the Year 2000 problem.  We performed our work
at FDIC headquarters in Washington, D.C.; its office in Arlington,
Virginia; and its field office in Atlanta, Georgia, during December
1997 and January 1998 in accordance with generally accepted
government auditing standards. 

In summary, we found that the Year 2000 problem poses a serious
dilemma for banks due to their heavy reliance on information systems. 
It also poses a challenge for FDIC and the other bank regulators who
are responsible for ensuring bank industry readiness.  Regulators
have a monumental task in making sure that financial institutions
have adequate guidance in preparing for the Year 2000 and in
providing a level of assurance that such guidance is being followed. 
Further, regulators will likely face some tough decisions on the
readiness of individual institutions as the millennium approaches. 
We found that FDIC is taking the problem very seriously and is
devoting considerable effort and resources to ensure the banks it
oversees mitigate Year 2000 risks.  The corporation has been very
emphatic in alerting banks to the Year 2000 problem and has conducted
a high-level assessment of the industry's Year 2000 readiness. 

Despite aggressive efforts, FDIC still faces significant challenges
in providing a high level of assurance that individual banks will be
ready.  First, FDIC--as were the other regulators--was late in
addressing the problem.  Consequently, it is behind the Year 2000
schedule recommended by both GAO and the Office of Management and
Budget (OMB).  Compounding this problem is that critical guidance,
although under development, has not been released by the Federal
Financial Institutions Examination Council (FFIEC)\3 for banks and
other financial institutions on contingency planning, assessing risks
caused by corporate customers (borrowers), and assessing risks
associated with third-party automated system service providers.  This
guidance should have been provided earlier so that banks would have
had more time to factor the guidance into their own assessments and
plans.  Additionally, FDIC's ability to report on individual bank's
status in preparing for the year 2000 is limited by insufficient
information being reported by bank examiners. 

FDIC also needs to correct its internal systems used to support
agency functions and has initiated efforts to do this.  FDIC is
behind in assessing whether these systems are Year 2000 compliant. 
Although OMB guidance states that the assessment phase should have
been completed in mid-1997, FDIC has not yet fully assessed its
mission-critical systems or established contingency plans in case
systems repairs and replacements are not in place on time or do not
work as intended. 

We are making recommendations to strengthen both FDIC's examination
process and its internal mitigation processes. 


--------------------
\1 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) and Year 2000
Computing Crisis:  Actions Needed to Address Credit Union Systems'
Year 2000 Problem (GAO/AIMD-98-48, January 7, 1998). 

\2 Year 2000 Computing Crisis:  An Assessment Guide
(GAO/AIMD-10.1.14, September 1997).  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 addresses common issues affecting most federal agencies and
presents a structured approach and a checklist to aid in planning,
managing, and evaluating Year 2000 programs.  The guide describes
five phases--supported by program and project management
activities--with each phase representing a major Year 2000 program
activity or segment.  While the guide focuses on federal agencies,
nonfederal organizations can also use it to assess their automated
systems. 

\3 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 bank regulators--FDIC, the Federal Reserve System, and the
Comptroller of the Currency--plus the regulators for credit unions
and thrift institutions--the National Credit Union Administration and
the Office of Thrift Supervision, respectively. 


   THE YEAR 2000 POSES A SERIOUS
   PROBLEM FOR BANKS
---------------------------------------------------------- Chapter 0:1

The Federal Deposit Insurance Corporation is the deposit insurer of
approximately 11,000 banks and saving institutions.  Together, these
institutions are responsible for about $6 trillion in assets and have
insured deposits totaling upwards of $2.7 trillion.  FDIC also has
responsibility for directly supervising approximately 6,200 of these
institutions (commonly referred to as state-chartered, nonmember
banks), which on average have $250 million in assets.  As part of its
goal of maintaining the safety and soundness of these institutions,
FDIC is responsible for ensuring that banks are adequately mitigating
the risks associated with the century date change.  To ensure
consistent and uniform supervision on Year 2000 issues, FDIC and the
other banking regulators coordinate their supervisory efforts through
FFIEC.  For example, the regulators established an FFIEC working
group to develop guidance on mitigating the risks associated with
using contractors that provide automated systems services and
software to banks. 

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 on
electronic data storage and reduce operating costs.  With this
two-digit format, however, the year 2000 is indistinguishable from
1900, or 2001 from 1901, etc.  As a result of this ambiguity, system
or application programs that use dates to perform calculations,
comparisons, or sorting may generate incorrect results, or worse, not
function at all. 

According to FDIC, virtually every insured financial institution
relies on computers--either their own or those of a third-party
contractor--to provide for processing and updating of records and a
variety of other functions.  Because computers are essential to their
survival, FDIC believes that all its institutions are vulnerable to
the problems associated with the year 2000.  Failure to address Year
2000 computer issues could lead, for example, to errors in
calculating interest and amortization schedules.  Moreover, automated
teller machines may malfunction, performing erroneous transactions or
refusing to process transactions.  In addition, errors caused by Year
2000 miscalculations may expose institutions and data centers to
financial liability and loss of customer confidence.  Other
supporting systems critical to the day-to-day business of banks may
be affected as well.  For example, telephone systems, vaults,
security and alarm systems, elevators, and fax machines could
malfunction. 

In addressing the Year 2000 problem, banks must also consider the
computer systems that interface with, or connect to, their own
systems.  These systems may belong to payment system partners, such
as wire transfer systems, automated clearinghouses, check clearing
providers, credit card merchant and issuing systems, automated teller
machine networks, electronic data interchange systems, and electronic
benefits transfer systems.  Because these systems are also vulnerable
to the Year 2000 problem, they can introduce errors into bank
systems. 

In addition to these computer system risks, banks also face business
risks from the Year 2000.  That is exposure from its corporate
borrower's inability to manage their own Year 2000 compliance efforts
successfully.  Consequently, in addition to correcting their computer
systems, banks have to periodically assess the Year 2000 efforts of
their large corporate customers to determine whether they are
sufficient to avoid significant disruptions to operations.  FDIC and
the other regulators established an FFIEC working group to develop
guidance on assessing the risk corporate borrowers pose to banks. 

To address Year 2000 challenges, GAO issued its Year 2000 Assessment
Guide\4 to help federal agencies plan, manage, and evaluate their
efforts.  It advocates a structured approach to planning and managing
an effective Year 2000 program through five phases.  These phases are
(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. 

As part of the assessment phase, the guide stipulates that interfaces
with outside organizations be identified and agreements with these
organizations executed for exchanging Year 2000-related data. 
Contingency plans must be prepared during the assessment phase to
ensure that agencies can continue to perform even if critical systems
have not been corrected.  Working back from January 1, 2000, GAO and
OMB have established a schedule for completing each of the five
phases.  According to that schedule, agencies should have completed
assessment phase activities last summer and should complete the
renovation phase by mid- to late 1998. 


--------------------
\4 GAO/AIMD-10.1.14, September 1997. 


   FDIC HAS DEVELOPED A STRATEGY
   AND HAS INITIATED ACTION TO
   ADDRESS THE YEAR 2000 PROBLEM
---------------------------------------------------------- Chapter 0:2

FDIC has taken a number of actions to raise the awareness of the Year
2000 issue among banks and to assess the Year 2000 impact on the
industry.  To raise awareness, FDIC formally alerted banks in July
1996 to the potential dangers of the Year 2000 problem by issuing an
awareness letter to bank Chief Executive Officers.  The letter, which
included a statement from the interagency Federal Financial
Institutions Examination Council, described the Year 2000 problem and
highlighted concerns about the industry's Year 2000 readiness.  It
also called on banks to perform a risk assessment of how systems are
affected and develop a detailed action plan to fix them. 

In May 1997, FDIC issued a more detailed awareness letter that

  -- described the five-phase approach to planning and managing an
     effective Year 2000 program;

  -- highlighted external issues requiring management attention, such
     as reliance on vendors, risks posed by exchanging data with
     external parties, and the potential effect of Year 2000
     noncompliance on corporate borrowers;

  -- discussed operational issues that should be considered in Year
     2000 planning, such as whether to replace or repair systems;

  -- related its plans to facilitate Year 2000 evaluations by using
     uniform examination procedures; and

  -- directed banks to (1) inventory core computer functions and set
     priorities for Year 2000 goals by September 30, 1997, and (2) to
     complete programming changes and to have testing of
     mission-critical systems underway by December 31, 1998. 

To manage both internal and external Year 2000 efforts, FDIC
established a Year 2000 oversight committee, consisting of the deputy
directors of all offices and divisions, that reports to the FDIC
Board of Directors.  Among other matters, the committee is
responsible for coordinating interagency working groups, contingency
planning, public information campaign, institution outreach and
education, and reporting on the results of bank assessments and
examinations. 

As of December 31, 1997, FDIC had completed its initial assessment of
all banks for which it has supervisory responsibility.  In doing so,
FDIC surveyed banks on whether (1) their systems were ready to handle
Year 2000 processing, (2) they had established a structured process
for correcting Year 2000 problems, (3) they prioritized systems for
correction, and (4) they had 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.  In addition,
FDIC assessed whether sufficient resources were targeted at the Year
2000 problem and if bank milestones for renovating and testing
mission-critical systems were consistent with those recommended by
FFIEC.  According to the FDIC, this assessment identified over 200
banks that were not adequately addressing the Year 2000 problem and
over 500 banks that are very reliant on third-party servicers and
software providers and have not followed up with their servicers and
providers to determine their Year 2000 readiness. 

FDIC plans to follow up on this initial assessment, which was
conducted largely by telephone, with on-site visits to all banks to
be completed by the end of June 1998.  FDIC has also been
participating with other regulators to conduct on-site Year 2000
assessments of 275 major data processing servicers and 12 major
software vendors.  According to FDIC, these servicers and vendors
provide support and products to a majority of financial institutions. 
FDIC and the other regulators expect to complete their first round of
servicer and vendor assessments by March 31, 1998.  FDIC is providing
the results of the servicer assessments to FDIC-supervised banks that
use these services.  Together with the results of on-site assessments
conducted at banks, FDIC expects to have a better idea of where the
industry stands, which banks need close attention, and thus, where to
focus its supervisory efforts. 


   CONCERNS WITH FDIC'S EFFORTS TO
   ENSURE BANKS ARE YEAR 2000
   READY
---------------------------------------------------------- Chapter 0:3

The primary challenge facing FDIC, and indeed all the banking
regulators, in providing a level of assurance that the banking
industry will successfully address the Year 2000 problem is time. 
FDIC's late start in developing an industry assessment is further
compounded by two other factors:  (1) its initial assessment and the
follow-on assessment to be completed in June 1998 are not collecting
all the data required to be definitive about the status of individual
banks and (2) key guidance--being developed under the auspices of
FFIEC--needed by banks to complete their own preparations is also
late which, in turn, could potentially hamper individual banks'
abilities to address Year 2000 issues. 


      NEED FOR ADDITIONAL DATA
      PRECISION
-------------------------------------------------------- Chapter 0:3.1

Although late in getting its initial assessments completed, FDIC has
developed a perspective of where the banks it regulates stand on
being ready for Year 2000.  As outlined earlier, it plans on
completing a more detailed assessment of banks by the end of June
1998.  FDIC plans to use this information along with information
obtained from the FFIEC servicer and vendor assessments to further
refine its oversight activities. 

We think FDIC's strategy in using this information to target
activities over the remaining 18 months is appropriate and necessary
to make the best use of limited time.  However, we believe that
neither the initial nor the follow-on assessment work program is
collecting all the data needed to determine where (i.e., in which
phase) the banks are in the Year 2000 correction process.  For
example, neither the guidance used to conduct the initial assessment
nor the guidance that is to be used to conduct follow-on assessments
contains questions that ask whether specific phases have been
completed.  In addition, the terms used in the FFIEC guidance to
describe progress are vague.  For example, it notes that banks should
be well into assessment by the end of the third quarter of 1997, that
renovation for mission-critical systems should largely be completed,
and testing should be well underway by December 31, 1998.  Without
defining any of these terms, it will be very hard to deliver uniform
assessments on the status of banks' Year 2000 efforts. 

Furthermore, the tracking questionnaire examiners are required to
complete after their on-site assessments is organized on the basis of
the five phases; however, it does not ask enough questions within
each of the five phases to determine whether the bank has fully
addressed the phases.  For example, for the assessment phase, the
questionnaire asks whether (1) a formal assessment has been conducted
and if all mission-critical application and hardware systems have
been identified, (2) a budget has been established for testing and
upgrading mission-critical systems, and (3) the budget is reasonable. 
But these questions do not specifically cover critical assessment
steps recommended in our Assessment Guide, including: 

  -- conducting an enterprisewide inventory of information systems;

  -- using the inventory to develop a comprehensive automated system
     portfolio;

  -- establishing Year 2000 project teams for business areas and
     major systems;

  -- developing a Year 2000 program, which includes schedules for all
     tasks and phases, a master conversion and replacement schedule,
     and a risk assessment;

  -- developing testing strategies and plans;

  -- defining requirements for testing facilities;

  -- identifying and acquiring Year 2000 tools;

  -- addressing interface and data exchange issues; and

  -- formulating contingency plans. 

In discussing this concern with FDIC officials, they told us that
they intended to rely on the judgment of the examination staff to
place institutions in specific categories.  We agree on the need to
rely on examiner judgment; however, we believe that having additional
information will allow the examiners to conduct a more thorough
assessment and can greatly enhance their capability to make a more
accurate judgement.  In turn, this could improve the ability of FDIC
to properly focus its resources over the remaining time available. 


      CONTINGENCY PLANNING
      GUIDANCE NOT YET AVAILABLE
-------------------------------------------------------- Chapter 0:3.2

FDIC and FFIEC have yet to complete and issue contingency planning
guidance to the banks.  Our Assessment Guide recommends that
contingency planning begin in the assessment phase for critical
systems and activities.  FDIC officials told us they are working with
the other regulators to establish a working group to address this
issue.  While this guidance is needed, it would have been more
appropriate to make it available before banks began completing their
assessment phase efforts. 


      GUIDANCE LATE FOR BANK
      INTERACTION WITH VENDORS
-------------------------------------------------------- Chapter 0:3.3

Regulators have found that some financial institutions, relying on
third-party data processing servicers or purchased applications
software, have not taken a proactive approach in ensuring Year 2000
compliance by their vendors.  In a May 1997 letter to banks, the
regulators recommended that banks begin assessing their risks with
respect to vendors and outlined an approach for dealing with vendors
that included the need to (1) evaluate and monitor vendor plans and
milestones, (2) determine whether contract terms can be revised to
include Year 2000 covenants, and (3) ensure vendors have the capacity
to complete the project and are willing to certify Year 2000
compliance.  The regulators also agreed to provide guidance on how
each of the steps should be implemented.  However, the regulators do
not plan to issue this guidance until the end of March 1998.  While
this time frame cannot be significantly shortened, the timing of this
specific guidance is coming at a very late date for some banks that
have not been active in working with their vendors or that may lack
sufficient technical expertise to evaluate vendor preparedness. 


      GUIDANCE LATE ON CORPORATE
      CUSTOMER YEAR 2000 READINESS
-------------------------------------------------------- Chapter 0:3.4

Banks--even those who have Year 2000 compliant systems--could still
be at risk if they have significant business relations with corporate
customers who, in turn, have not adequately considered Year 2000
issues.  If these customers default or are late in repaying loans,
then banks could experience financial harm. 

In its May 1997 letter, the regulators also recommended that banks
begin developing processes to periodically assess large corporate
customer Year 2000 efforts and to consider writing Year 2000
compliance into their loan documentation, and FDIC later informed its
institutions that the Year 2000 risks associated with corporate
customers and reliance on vendors would be included in FDIC's
follow-up assessments.  The regulators again agreed to provide
guidance on how institutions should do this, and the criteria
defining safe and sound practices.  However, the guidance being
developed on this issue is also not expected until the end of March
1998.  These time lags in providing guidance increase the risk that
banks may have initiated action that does not effectively mitigate
vendor and borrower risks or that banks have taken little or no
action in anticipation of pending regulator guidance. 


   CONCERNS WITH FDIC'S EFFORTS TO
   CORRECT ITS INTERNAL SYSTEMS
---------------------------------------------------------- Chapter 0:4

FDIC internal systems are critical to the day-to-day operation of the
corporation.  For example, they facilitate the collection of bank
assessments, keep accounts and balances for failed banks, schedule
examinations, and calculate FDIC employee payroll benefits.  The
effects of Year 2000 failure on FDIC, in its own words, could range
from "annoying to catastrophic." FDIC system failures could, for
example, result in inaccurate or uncollected assessments, inaccurate
or unpaid accounts payable, and miscalculated payroll and benefits. 
Accordingly, FDIC developed an internal Year 2000 project plan that
followed the structured five-phased approach recommended in our
Assessment Guide.  To raise awareness among FDIC employees, FDIC
conducted more than 40 briefings for corporate staff throughout its
divisions and offices.  It also has disseminated Year 2000
information through the Internet and internal newsletters.  To assess
Year 2000 impact, FDIC conducted an inventory and "high-level"
assessment of approximately 500 internal systems that consist of
about 15 million lines of program code.  In addition, FDIC engaged a
contractor to assist in conducting detailed system assessments,
defining requirements for test environments, and renovating and
testing code. 

We have two concerns with FDIC's effort to correct its internal
systems.  First, FDIC is taking much longer to assess its systems
than is recommended by our guide as well as OMB and technology
experts.  Second, FDIC has yet to develop contingency plans to ensure
continuity of core business processes, which our guide points out
need to be started early in the Year 2000 effort. 

Currently, FDIC is still assessing which of its systems need Year
2000 corrections, and it does not expect to finish this assessment
until March 1998.  Specifically, FDIC has yet to fully assess its 40
mission-critical systems.  Our guide recommends that agencies make
these determinations by mid-1997 in order to have enough time to
complete the next three stages of correction.  By taking additional
time to complete assessment, FDIC is leaving itself with much less
time to complete renovation, testing, and implementation, and, thus,
it is increasing the risk that it will not complete its Year 2000
fixes on time. 

Compounding this problem is the fact that FDIC has yet to develop
contingency plans for its mission-critical systems and core business
processes.  Rather than begin developing contingency plans for
critical systems and core business processes, as our Assessment Guide
recommends, FDIC intends to develop plans only for those systems that
experience unforeseen problems or delays in correction or replacement
efforts.  In addition, FDIC had not yet prepared a contingency plan
to ensure continuity of its core business processes.  In pursuing
this approach, FDIC is failing to heed advice that it holds banks
accountable to:  preparing contingency plans that focus on ensuring
that internal operations will be sustained.  The FFIEC states that
the board of directors and senior management are responsible for
organizationwide contingency planning, which assesses the importance
of an institution's departments, business units, and functions and
determines how to restore critical areas should they be affected by
disaster. 

In addition, preparing contingency plans on an as-needed basis is
risky in several respects.  First, programmers cannot always foresee
system problems.  Without contingency plans, FDIC will not be
prepared to respond to unforeseen problems.  Second, FDIC's Year 2000
strategy for many systems involves replacing systems in 1998 and
1999.  In the event that replacement schedules slip, FDIC may not
have enough time to renovate, test, and implement a legacy system or
identify other alternatives, such as manual procedures or
outsourcing.  Third, even if systems are replaced on time, there is
no guarantee that the new systems will operate correctly.  FDIC
tasked its contractor with providing guidance on preparing
contingency plans for its mission-critical systems and the contractor
provided draft guidelines on January 28, 1998, with the goal of
making them final by the end of February 1998. 


-------------------------------------------------------- Chapter 0:4.1

In conclusion, Mr.  Chairman, we believe that FDIC has a good
appreciation for the Year 2000 problem and has made significant
progress since last year.  Further, we believe that FDIC's strategy
of using the results of the service provider and vendor assessments
in conjunction with the more complete assessments of individual banks
in order to best focus resources is a reasonable approach.  However,
FDIC and the other regulators are facing a finite deadline that
offers no flexibility.  We believe that FDIC needs to take several
actions to improve its ability to make informed judgments about bank
status and to enhance the ability of banks to meet the century
deadline with minimal problems.  We, therefore, recommend that FDIC

  -- work with the other FFIEC members to expeditiously revise the
     Year 2000 assessment work program to include questions on each
     phase of the correction process, such as those outlined in our
     Assessment Guide, to better enable examiners to determine and
     report the exact status of each bank and vendor in addressing
     the Year 2000 problem.  FDIC should also apply the revised Year
     2000 assessment work program to each bank and vendor, including
     those where assessments are completed, to determine whether
     appropriate data have been obtained to make complete
     assessments. 

We also recommend that FDIC

  -- work with the other FFIEC members to complete by the end of
     March 1998, their guidance to institutions on mitigating the
     risks associated with corporate customers and reliance on
     vendors.  Further, FDIC should work with the other FFIEC members
     to quickly establish a working group to develop contingency
     planning guidance and set a deadline for completing this effort. 

Additionally, we believe that a combination of factors including
starting the bank assessment process late and issuing more specific
guidance to banks at a relatively late date has greatly compressed
the time schedule available for FDIC and other members of FFIEC to
develop more positive assurance that banks will be ready for the year
2000.  Accordingly, we recommend that FDIC work with the other FFIEC
members to

  -- develop, in an expeditious manner, more explicit instructions to
     banks for carrying out the latter stages of the Year 2000
     process--renovation, validation, and implementation--which are
     the critical steps to ensuring Year 2000 compliance. 

Because the results of the bank assessments to be completed this June
are so critical to FDIC in focusing its activities through the year
2000, we recommend that FDIC

  -- develop a tactical plan that details the results of its
     assessments and provides a more explicit road map of the actions
     it intends to take based on those results. 

Finally, with regard to FDIC's internal systems, we recommend that
the Chairman direct the Year 2000 oversight committee to (1) ensure
that adequate resources are allocated to complete the internal
systems' assessment by the end of March 1998 and take necessary
action to ensure this effort is completed on time and (2) develop
contingency plans for each of FDIC's mission-critical systems and
core business processes. 


-------------------------------------------------------- Chapter 0:4.2

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


*** End of document. ***