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Committee on Financial Services

United States House of Representatives

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The Committee on Banking and Financial Services
U.S House of Representatives, 105th Congress
James A. Leach, Chairman

Phone: (202) 226-0471 Fax: (202) 226-6052 Internet:

For Immediate Release                                              
Tuesday, June 23, 1998   Andrew Biggs 226-0471

Opening Statement
Of Rep. James A. Leach
Chairman, House Banking and Financial Services Committee
Full Committee Hearing
The Year 2000 Challenge to International Banking and Finance

The Committee convenes today for the fourth in a series of oversight hearings on the Year 2000 technology problem. The international banking and finance dimension of the issue is the subject of today’s session.

International Year 2000 readiness is critical in this era of global interdependence. While some have speculated that there may be a run to American banks located overseas if local institutions fail to make the Year 200 conversion deadline, such competitive advantages may be fleeting in the long run if there are broad, systemic problems with international banking and finance in the days after the start of the year 2000. No matter how well prepared American banks and businesses are for the new millennium, it is difficult to imagine how our banking systems and domestic economy can escape the consequences of a weak link in the worldwide chain connecting banks and their customers, trading partners, suppliers, telecommunications networks, and other counterparties. Their risks, to a large extent, are also our risks.

The scale of global economic interdependence is graphically illustrated in the following statistics:

  • Over a trillion in global foreign exchange transactions occur daily, of which more than 80 percent involves the U.S. dollar.
  • Worldwide investment figures from the United Nations Conference on Trade and Development (UNCTAD) show over 275,000 foreign-owned affiliates located in local economies around the world, with over 18,000 of those in the United States.
  • Global trade, as measured by exports, exceeds $5 trillion, of which US exports are roughly 12% of the total.

It is because of these broad, and complex interdependencies, that the Committee has invited a distinguished panel of witnesses here today to address four major areas of concern.

First, what is the scope of the Year 2000 risk to international banking and finance? What are the risks to US financial institutions and businesses from non-compliant foreign banks and trading partners? Are the risks being exaggerated or understated? Is there anything unique or extraordinary about Y2K related risks or are they no different than the ordinary, every day kinds of risks with which financial institutions, payment systems, and trading partners deal routinely?

At least preliminarily, the evidence which has accumulated in recent months is not reassuring. For example, the international Basle Committee on Bank Supervision issued a statement last fall in which it called the Year 2000 issue "potentially the biggest challenge ever faced by the financial industry." It warned that failure to address it in a timely manner "would cause banking institutions to experience operational problems or even bankruptcy and could cause disruption of financial markets."

The Board of Governors of the Federal Reserve recently reported to this Committee that there is concern that "most foreign markets and financial institutions are lagging U.S. organizations by anywhere from 3 to 18 months."

Richard Grasso of the New York Stock Exchange sounded similar warnings, calling the potential impact of the Y2K problem on domestic and international markets "profound."

A Computer Sciences Corporation report which came across my desk earlier this year suggested that under certain scenarios, international Y2K related settlement difficulties could cost anywhere from $495 million a day to $5.2 billion over five days.

And, in the most alarming and we hope extreme assessment, Edward Yardeni of Deutsche Morgan Grenfell suggests a 60 percent chance of a global recession precipitated by the Y2K problem.

The nature of these kinds of statements and assessments leads to a second line of questioning: What is the international community doing to address those risks? Are foreign bank supervisors, international financial institutions, and other responsible organizations doing enough to address the problem? Is the United States itself doing enough to assist in this effort? What safeguards are already in place to address systemic risks to international financial transactions? How adequate are those safeguards in the context of the Year 2000 problem and what, if any, additional safeguards may be required?

It is encouraging to note the increasing level of international attention that is being given to the problem. After a global Year 2000 roundtable session in April, the Basle Committee on Banking Supervision and three partners established a "Joint Year 2000 Council" of international banking, payment system, insurance, and securities regulators. Similarly, the Global 2000 Coordinating Group has been formed under private sector auspices to target the most important international financial markets for Year 2000 remediation.

The increasing level of international activity in addressing the Year 2000 issue prompts a third area of questions: How can the United States and other affected parties accurately monitor international Year 2000 progress during the next 18 months? Is "activity" translating into results and concrete action? What kinds of benchmarks should we be looking for? Will there be full disclose of Year 2000 preparations and testing results to help instill confidence among international financial and trading partners?

Thanks to the work of the Federal Financial Institution Examination Council (FFIEC), these kinds of questions may be easier to answer at home than abroad. American financial institutions have clear timetables and deadlines by which key phases of Year 2000 compliance projects – such as assessment, remediation, and testing – are to be completed. As banks meet those deadlines – or fail to meet those deadlines – we will be able to develop a sense of progress. But is there such a framework for assessing international progress? Or will it be a mystery until December 31, 1999 as to which institutions, payment systems, and other parties have actually completed the necessary work to ensure a smooth transition to 2000?

Finally, are there additional actions the United States – including the Congress – should take to support international efforts? Are changes needed to US international economic policy or US law to remove obstacles to international Year 2000 compliance or to facilitate the kind of contingency planning that may be needed? How can we best protect American financial institutions and businesses from Y2K risks from non-compliant counterparties? What kinds of contingency plans are needed if – in spite of the best efforts of all parties – Year 2000 disruptions to international financial transactions do occur?

We begin the hearing today with a lot of questions and very few answers. To help shed some light on these issues, the Committee has invited a panel of five distinguished experts: Ernest Patrikis, First Vice President of the Federal Reserve Bank of New York and chairman of the Joint Year 2000 Council; Tim Shepheard-Walwyn, Executive Director of Swiss Bank Corporation representing the Global 2000 Coordinating Group; John Mohr, Executive Vice President of the New York Clearinghouse Association; John Towers, Executive Vice President for Global Operations of State Street Corporation; and Samuel Theodore, Managing Director of Moody’s Investors Service’s London office. Unfortunately, both the Department of State and the Department of the Treasury declined to send witnesses but have submitted written statements for the hearing record.





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