New Supervisory Initiatives to Intensify Year 2000 Compliance Efforts
March 19, 1998
Circular No. 11036

To the Chief Executive Officers of All State Member Banks, Bank Holding Companies, Edge and Agreement Corporations, and Branches and Agencies of Foreign Banks, in the Second Federal Reserve District, and Related Vendors Serving These Organizations:

Assuring that computer systems and applications are Year 2000 compliant presents a complex managerial and technological challenge for all enterprises, both public and private. For entities such as financial institutions that rely heavily on computers to provide financial services to customers, achieving Year 2000 compliance in mission-critical systems is essential, not only for maintaining the quality and continuity of the services but also for assuring the very survival of the entity itself. While bank supervisors can provide guidance, encouragement, and strong formal and informal supervisory incentives to the banking industry to address this challenge, the supervisors cannot be responsible for ensuring or guaranteeing the Year 2000 readiness and viability of each system used by the banking institutions they supervise. Rather, the boards of directors and senior management of banks and other financial institutions must shoulder the responsibility for ensuring that the institutions they manage are able to provide high quality and continuous services beginning on the first business day in January of the Year 2000 and beyond. This critical obligation must be among the very highest of priorities for bank management and boards of directors.

The Federal Reserve recently announced the intensification of its Year 2000 bank supervision program. The Federal Reserve Bank of New York wants your organization to be fully aware of the additional actions that the Federal Reserve is taking to monitor and assess a banking organization's readiness for the century date change, and, where necessary, restrict expansionary plans or take appropriate follow-up supervisory actions in the event any banking organization's compliance with the guidelines -- set forth in the May 5, 1997 FFIEC statement entitled "Year 2000 Project Management Awareness" and related FFIEC advisories -- is rated as less than satisfactory by examiners.

In brief, the important new actions include:

  • The use of a new three-tier interagency supervisory rating system to evaluate a banking organization's program to achieve Year 2000 compliance. A state member bank, bank holding company, and U.S. office of a foreign bank supervised by the Federal Reserve will be assigned a rating of "satisfactory", "needs improvement", or "unsatisfactory" following a review of its compliance with the guidance set forth in the FFIEC's May 5, 1997 Interagency Statement and other related FFIEC advisory statements.
  • Federal Reserve Banks will issue a Year 2000 deficiency notification letter to a banking organization receiving an assessment of "needs improvement" or "unsatisfactory" for its compliance with the Interagency Statement. For a banking organization subject to the supervision of the Federal Reserve, the assignment of a less than satisfactory supervisory rating for Year 2000 readiness will have the following consequences:

  • The financial institution will be required to develop promptly an acceptable plan for Year 2000 compliance consistent with the guidelines contained in the Interagency Statement and related FFIEC advisories.
  • The institution will be required to submit monthly progress reports to a Federal Reserve Bank and include written descriptions of the actions that it is taking to comply with its plan.
  • The bank, bank holding company, or U.S. office of a foreign bank may be subject to a formal enforcement action in the event that it engages in unsafe or unsound practices by failing to comply with its Year 2000 corrective action plan.
  • Before entering into any commitment to make an acquisition or to merge, or to engage in any expansionary activity requiring regulatory approval (or publicly announcing any such action), a banking organization will be asked to advise a Federal Reserve Bank regarding its plans, and then will have to demonstrate compliance with its Year 2000 plan and explain how the proposed expansionary activity affects its Year 2000 remedial program.
  • The expedited applications procedures set forth in Regulation Y of the Board of Governors will not be available for bank or nonbank acquisitions.
  • The Federal Reserve will intensify its coordination with other federal and state bank supervisory agencies as well as with foreign bank supervisory authorities in order to improve its ability to evaluate compliance with banking organizations' Year 2000 readiness programs and, where needed, take appropriate follow-up supervisory actions. This coordination effort will be most important in situations where the Federal Reserve is responsible for the supervision of a bank holding company and the primary federal or state regulator of a subsidiary bank assesses its compliance as less than satisfactory. This may result in the issuance of a Year 2000 deficiency notation letter by a Federal Reserve Bank or other supervisory follow-up. Whether or not a Federal Reserve notification letter is issued, the staffs of the Board and the Federal Reserve Banks will evaluate any expansionary proposal by a bank holding company with a subsidiary bank whose Year 2000 compliance is less than satisfactory (or by a foreign bank whose U.S. branch or agency is similarly rated by another regulatory authority) using the criteria described above and in the enclosures, and will request prior notification regarding any expansionary plans.
  • Recognizing the important role played by service providers in banking organizations' efforts to become Year 2000 compliant, the Federal Reserve and the other federal banking agencies are assisting banks' and other financial institutions' Year 2000 remedial programs by beginning to make available information on service providers relating to their Year 2000 compliance to client banking organizations.

The SR Letter and statement fully describe the Federal Reserve's new Year 2000-related bank supervision initiatives, and we urge your senior management and the members of your board of directors to read them carefully and consider the implications of noncompliance with the guidance set forth in the FFIEC's May 5, 1997 Interagency Statement and other related FFIEC advisory statements.

In the event you have any questions regarding the Federal Reserve's Year 2000 bank supervision program, please contact, at this Bank, Sarah Dahlgren, Vice President, Bank Supervision Group, or William Francis or Thomas Wines, Examining Officers, Bank Supervision Group (respectively).