Guideline No. 16.1
The Year 2000 Problem
You will be aware that the HKMA has taken a number of initiatives on the Year 2000 problem in respect of authorized institutions in Hong Kong. The Year 2000 problem is, of course, a global issue which was the subject of discussion at a recent meeting of the Basle Committee on Banking Supervision.
The Committee concluded that not only will a large number of applications have to be converted or replaced, but extensive testing will be necessary to ensure that all operations run smoothly after conversion. Compounding the issue is the fact that institutions only have a limited amount of time to deal with this problem.
The Basle Committee has also drawn up a technical paper on the Year 2000 issue which sets out a strategic approach for the development, testing and implementation of system changes. It also provides a reference to central banks and other banking supervisors on the role they should play in the promotion and enforcement of actions.
This paper is a good reference for authorized institutions ("AI") and I enclose herewith a copy of the paper and the associated press statement for your information. As you will see, the HKMA's supervisory approach is largely in line with the recommendations made in the paper. Authorized institutions should take into account the issues raised in the paper when implementing their Year 2000 projects.
The results of our questionnaire survey in May indicated that most institutions in Hong Kong have initiated actions to address the problem with a plan for all system modifications to be completed by 31 December 1998. This should allow sufficient time for institutions to test their systems both internally and with their counterparties. You should note that in line with the Basle Committee's recommendation at para. 20 of the technical paper, the HKMA expects institutions to complete their internal validation work and start industry and business wide testing with all correspondents and customers no later than mid-1999*. Should institutions encounter major problems that are unlikely to be resolved in time, they should consider alternative or contingency plans and discuss with the HKMA immediately.
* However, the paper notes that the testing of certain high priority systems involving third parties should preferably be completed by the end of 1998.
There are indications that the general awareness level outside the banking sector may be weaker. Institutions should also consider the credit risks arising from their customers whose business could be adversely affected by the Year 2000 problem. Corporate customers who have not considered the impact of the Year 2000 problem on their operations may experience a disruption in business, resulting in financial difficulties that could impede their ability to repay. The HKMA therefore expects institutions to take this into account in their credit assessment processes.
Should you have any questions on this subject, please contact Mr. Ros Lam, Head of Banking Policy (Special Duties) Division at 2878 8828.
