Seeking to protect the payments system from year-2000 computer problems, the Federal Reserve Board next month will launch a comprehensive program for banks to test computers used for Fed Wire and automated clearing house transactions.

The initiative will allow banks to send dummy payments programmed with a variety of dates after Jan. 1, 2000. This testing will permit banks to determine whether they have eliminated their millennium bugs.

"We have to make sure everyone is fully compliant and fully tested," said Federal Reserve Governor Edward W. Kelley Jr. "This work will go on 24 hours a day, six days a week."

Bankers applauded the move. "This is an excellent idea," said Abraham L. Nader, senior vice president and chief operating officer at Dollar Bank in Pittsburgh. "To have the Fed set up a test system so we may use their resources to test our systems is a welcome addition."

"Banks are all working on year-2000 problems independently, and they need a vehicle to test transactions between them," said Martin Langer, vice president and year-2000 project director at M&I Data Services, a subsidiary of the bank holding company Marshall & Ilsley Corp. "The Fed is stepping up and that is very good."

In a wide-ranging interview on year-2000 issues, Mr. Kelley said the Federal Financial Institutions Examination Council plans at least three year-2000 advisories in the first quarter. The first, expected shortly, will detail best practices for testing year-2000 fixes. The other advisories will warn banks to consider year-2000 when extending commercial loans and will discuss banks' responsibilities to check compliance by outside data-processing vendors, he said.

Meanwhile, the Mortgage Bankers Association has launched its own year- 2000 initiative to ensure systems that calculate interest payments are fixed in time. (See story on page 8.)

Mr. Kelley warned that the Fed will not tolerate banks that try to ignore the issue.

"If they are not moving along and showing evidence of being prepared, then that is a safety-and-soundness problem and will be treated as such," he said.

Although he said he does not expect year-2000 problems to cause any banks to fail, he said some banks may find themselves unable to operate for the first few days of the new millennium.

Examiners will complete an initial round of year-2000 reviews by midyear, he said. These will be followed-up by additional scrutiny to ensure no institution falls behind, he said.

Some of the biggest problems are overseas, he said. "There are countries where we wish regulators would be more aggressive than they are," he said, although he declined to name specific nations.

Preliminary results from a recently completed Basel Committee study indicate that most G-10 countries are getting ready for the millennium, but problems persist in developing countries, he said.

Year-2000 compliance is expected to cost the Fed nearly $100 million. Most of that is being spent on 450 full-time and nearly 1,000 part-time workers devoted to fixing code and checking applications.

For its payments initiative, the Fed will publish shortly in the Federal Register a schedule of specific services banks may test each day on the system, which will be housed at Federal Reserve Bank of Richmond. The test facility is expected to remain on-line through next year.

Besides giving banks a chance to check their systems, the Fed also plans to self-test the agency's computers that operate Fed Wire and ACH, although Mr. Kelley noted that both applications were replaced during the past five years with year-2000-compliant systems.

The central bank also is nearly done replacing 90 million lines of code for its check clearing, accounting, and cash management systems. The Fed plans to have all of its computers fixed by June and the 12 reserve banks will be finished by the end of December, Mr. Kelley said.

"The Federal Reserve is doing everything possible to be ready," said Mr. Kelley, who chairs the central bank committee responsible for year-2000 compliance.

The millennium problem affects older software in which programmers left room only for the last two digits of the date. The year 1999 would be represented as 99, and 2000 as 00. As a result, the systems could confuse 2000 with 1900.

The Federal Deposit Insurance Corp., the Office of Thrift Supervision, and America's Community Bankers are holding three joint conferences this quarter on the millennium bug.

Viveca Y. Ware, director of payments systems at the Independent Bankers Association of America, said other providers of payments services should follow the Fed's lead. "A lot of bankers have just been waiting for the Fed to announce testing," she said. "It is too bad other service providers are not offering similar services."

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