Year 2000 Preparations in the Australian Banking and Financial System 1. Introduction

1.1. What is the Year 2000 Problem?

The ‘Year 2000 problem’ has arisen because a large number of computer systems in operation today were not designed to deal with dates beyond 31 December 1999. These systems represent a year as a two-digit rather than four-digit value (e.g. ‘99’ for 1999) so that, when clocks tick over to 1 January 2000, the ‘00’ will most likely be interpreted as 1900 rather than 2000. The Year 2000 problem also includes issues related to the fact that 2000 is a leap year; this has not been recognised in a number of programs and systems.

Although solving the Year 2000 problem is simple in concept (namely, identifying the use of two-digit years and replacing them with four-digit years), doing so has proven to be time-consuming, expensive and resource-intensive. For many companies in Australia, including banks and other financial institutions, remedial action has involved many staff examining hundreds of thousands or even millions of lines of computer programs, testing every program and piece of electronic equipment and spending large sums of money on upgrades or replacements.

1.2 Impact of Year 2000

In an advanced economy like Australia, all businesses either rely on technology or are dependent on other businesses that do. This interdependence means that the Year 2000 problem is not just a technical problem but a problem potentially affecting all aspects of a business's operations. Failures of computing systems or electronic equipment in one organisation could have an immediate impact on others; if Year 2000 problems are not addressed adequately by most businesses, the consequences could be far-reaching. Banks and other financial institutions are particularly vulnerable in view of their heavy reliance on computer systems and electronic communications. However, banks and other financial institutions in Australia are well aware of the potential problems associated with the Year 2000 and have virtually completed their preparations for the date change.

1.3 Regulatory Responsibilities

Financial sector supervisors in Australia ­ the Australian Prudential Regulation Authority (APRA), the Reserve Bank of Australia (RBA), the Australian Securities and Investments Commission (ASIC) and, until 1 July 1999, the Australian Financial Institutions Commission (AFIC) ­ have been closely monitoring Year 2000 preparations in their respective areas. Through the Council of Financial Regulators (CFR), the supervisors have established a Year 2000 Coordinators Group to share information, to encourage a consistent approach in respect of regulated institutions and to coordinate involvement with local financial industry groups and international initiatives.

On 1 July 1998, responsibility for the supervision of banks was transferred from the RBA to APRA. At the same time, APRA took over responsibility for supervision of life and general insurance companies and superannuation funds from the former Insurance and Superannuation Commission. Responsibility for the supervision of building societies, credit unions and friendly societies was transferred from AFIC to APRA on 1 July 1999. Combining supervisory responsibilities within APRA has allowed a consistent approach to supervision and disclosure of Year 2000 issues across APRA-regulated institutions, representing the majority of participants in the Australian financial system.

The RBA remains closely involved in Year 2000 issues because of its responsibilities for the payments system and overall financial system stability. The RBA is an active member of a number of interbank groups addressing Year 2000 issues and is closely involved, through its membership of the Australian Payments Clearing Association (APCA), in testing of, and contingency planning for, domestic payments clearing systems.

The RBA is also responsible for Australia's currency note issue. The RBA is aware of the potential for the demand for currency notes to increase in the lead-up to the Year 2000. With this in mind, the RBA has taken steps to supplement the significant buffer stocks of notes it usually holds.

ASIC has been closely monitoring Year 2000 preparations as part of its responsibility for regulating securities markets and consumer aspects of insurance, superannuation and banking.

1.4 Measures Taken to Address the Issue

Substantial work has been undertaken to prepare the Australian financial system for the Year 2000.

Banks and other financial institutions have allocated significant financial and staffing resources to ready their systems for the date change. The vast majority of banks have completed the remediation and testing of all critical systems. In those exceptional cases where testing is yet to be completed, APRA is satisfied that there are adequate fallback arrangements in place to ensure that it will be ‘business as usual’. Banks have almost completed their contingency plans to deal with unexpected problems or problems outside of their control, such as problems with their suppliers.

Similarly, other financial institutions (building societies, credit unions, life and general insurance companies, superannuation funds and friendly societies) have also completed the vast majority of remediation and testing of critical systems and are now well into the contingency planning phase.

A comprehensive program to test the Year 2000 readiness of the Australian payments system, managed by the Australian Payments Clearing Association (APCA), was successfully completed, on time, by 30 June 1999 and no Year 2000 problems were reported by test participants. Because of this effort, the Australian public can be confident that their usual method of making non-cash payments, such as ATMs, EFTPOS and credit cards, will continue to work as usual over the New Year period. The RBA is now working closely with the industry on contingency planning, to ensure that the payments system is prepared for any unexpected disruptions.

The RBA and APRA have also been working closely with banks and other financial institutions to ensure that they will have adequate liquidity over the New Year period. In June 1999, the RBA announced that, if need be, it would be more flexible in its domestic market operations as the New Year approached by, for example, supplementing its dealings in government securities by trading in a broader range of securities. Financial institutions will not have to curtail their normal activities because of concerns that there will not be adequate liquidity in the financial system.

Securities markets have also made substantial progress in their Year 2000 preparations. The critical systems of the Australian Stock Exchange (ASX) are now Year 2000 ready. The Sydney Futures Exchange (SFE) has completed the compliance testing of its core systems with one exception, which is expected to be ready shortly. Contingency planning by both the ASX and SFE is well under way.

In his Opening Statement to the House of Representatives Standing Committee on Economics, Finance and Public Administration on 17 June 1999, the Governor of the Reserve Bank said:

[T]he Australian financial system is very well prepared for Y2K [and] rightly enjoys a world-class reputation for its high level of Y2K preparedness.

[T]he simple fact is that [customers'] deposits are safe and their records are not at risk from Y2K-related problems.

Overall, our view is that the system will be able to operate on a ‘business as usual’ basis and the public should view the new year as just another long weekend. For those who want a little extra reassurance in the form of extra cash, they can be confident that it will be readily available.

The Governor's comments on the Year 2000 issue can be found in Appendix 1.

1.5 Disclosure

The CFR believes that it is important for all organisations, financial or otherwise, to disclose the measures they are taking to address the Year 2000 issue. This information will assist those dealing with these organisations and reduce the need to make separate enquiries. The enactment of the Year 2000 Information Disclosure Act 1999 by the Commonwealth Parliament in February should encourage disclosure by removing some of the legal concerns associated with making Year 2000 statements.

Earlier this year, APRA wrote to the institutions it regulates encouraging them to use the disclosure templates produced by the Global 2000 Coordinating Group ­ an approach endorsed by the Joint Year 2000 Council (the respective roles of these two groups are outlined in Chapter 4.2). These templates are of particular use to institutions operating on a global basis, as they enable a standard form of disclosure internationally. Institutions should also disclose any other information that could be useful to those with whom they deal.

Financial institutions are well placed to influence their customers' awareness of the Year 2000 issue. This is especially important in the small- and medium-sized business sector, where businesses may not be taking sufficient measures to address the problem. The RBA has spoken to the banks, building societies and credit unions to make sure they are communicating with their customers in plain language to reassure them that their deposits are safe.

The ASX has also played a major role by requiring companies listed on the Exchange to provide Year 2000 disclosure statements as at 30 June 1998 and 31 March 1999. It has also required that another disclosure statement be provided by 30 September 1999.

Throughout July and August 1999, the year2k Industry Program of the Commonwealth Government held a series of Infrastructure Forums in major cities around Australia. Their aim was to advise Australian industry and the media of the Year 2000 readiness of key infrastructure and service providers such as banking and finance, electricity, gas/fuel, telecommunications, water, aviation, rail and road transport, ports and shipping. The RBA, APRA, the Australian Bankers' Association (ABA) and representatives from individual banks participated in these forums. The presentations by the RBA and ABA are available on their respective web sites (refer Appendix 2).

1.6 RBA/APRA Communications Centre

The RBA and APRA are establishing a joint communications centre which will operate over the New Year period. The centre will be located at the RBA's Head Office in Sydney.

The objective of the centre is to ensure that both the RBA and APRA are kept fully informed of developments affecting financial institutions and are able to communicate expeditiously with financial system participants about any necessary action. The centre will also allow the RBA and APRA to keep Government, the media and interested parties overseas (such as other financial regulators and central banks) informed of developments.

Reporting arrangements are now being finalised in close consultation with the industry and will be released shortly.

The following chapters outlines the Year 2000 preparations of financial institutions in Australia; the activities of the financial sector regulators; and preparations in payments and securities settlement systems. A list of useful Year 2000 web sites is provided in Appendix 2.

The full text of this booklet is available at the following web sites: www.rba.gov.au; www.apra.gov.au; and www.asic.gov.au.

Comments or questions may be sent over the Internet at the above websites, or to:

Year 2000 Liaison Officer
Reserve Bank of Australia
GPO Box 3947
SYDNEY NSW 2001

Year 2000 Liaison Officer
Australian Prudential Regulation Authority
GPO Box 9836
SYDNEY NSW 2001

Year 2000 Liaison Officer
Australian Securities and Investments Commission
GPO Box 4866
SYDNEY NSW 1042