The Federal Reserve Board is turning up the regulatory heat on banks whose year-2000 efforts are lagging.

A letter to Fed-supervised banks, made public Monday, said that the agency will heighten its oversight of institutions that scored "needs improvement" or "unsatisfactory" on year-2000 exams.

The letter also warns managers and directors that they-and not regulators-are ultimately responsible for their bank's year-2000 readiness.

Banks that fail to correct year-2000 problems face "potentially serious consequences," the Fed said. For instance, the Fed will force banks to file corrective action plans and submit monthly updates. It also may downgrade a bank's Camels rating.

The Fed also toughened previous statements regarding year-2000 laggards that wish to expand. Previously, the agency said it would take a bank's year-2000 readiness into account when considering its merger or acquisition application. Now the Fed says poor-scoring banks should consult examiners before they enter into serious negotiations on a deal. These banks also may not use the Fed's expedited application procedures.

Less than 10% of the banks that the Fed evaluated by Dec. 31 received an "unsatisfactory" rating, while the rest received a "satisfactory" score. Agency examiners did not begin using the "needs improvement" option until very recently. At the Federal Deposit Insurance Corp., by comparison, 19% of banks are "needs improvement" and 2% are "unsatisfactory." Fed- supervised banks whose preparations are rated "satisfactory" will escape additional supervision.

Nearly half of the Fed-supervised banks have yet to be evaluated. The Fed must examine them by June 30 in order to meet a federally set deadline.

Banks will soon receive even more year-2000 guidance. The Federal Financial Institutions Examination Council is expected to release next week year-2000-related guidance on vendor management and credit risk. As instructed by Congress, the General Accounting Office is preparing separate reports on each financial regulator's year-2000 progress. The GAO's report on the Fed is expected to be released this summer.

Richard Spillenkothen, the Fed's director of banking supervision and regulation, said the agency's decision to heighten its year-2000 oversight was not sudden. "We've always planned to increase and intensify our supervision when we thought it was appropriate," he said.

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