Address by Mr Koh Yong Guan, Managing Director, Monetary Authority of Singapore, at the ABS-MAS Joint Lunch

Date: 18 Mar 1999

Introduction

1   Good Afternoon Ladies and Gentlemen.

2   I am very encouraged that the financial industry has taken the initiative to organise itself and arrange this international conference. Your agenda is an important one. The Year 2000 problem is a real, non-negotiable threat that transcends geographical, industry, and regulatory boundaries. Your resolve and commitment to come together and foster a shared sense of purpose to tackle this problem is commendable.

Readiness of the Singapore Financial Sector

3   Let me begin by giving you an overview of the status of Y2K readiness in our financial sector.

4   The Singapore financial sector is now in its final phase of Y2K preparations, namely external testing and contingency planning. Nearly 90% of banks and financial institutions in Singapore have met the December 1998 deadline set by the Bank for International Settlements for the conversion of mission-critical systems. More significantly, the five big local banks have also met the deadline. This includes internal testing of systems. A series of Y2K external tests have also been carried out with major payment and clearing centres since August 1998. This involved almost 70% of financial firms. These tests have proven to be successful and were conducted well ahead of schedule.

5   Given the nature of the Year 2000 problem, no institution can assume that it has removed all threats to business continuity. MAS therefore requires all banks and financial institutions in Singapore to establish contingency plans and procedures. We have provided financial institutions a detailed set of guidelines. MAS has urged institutions to establish a dedicated business continuity project that will identify business-critical systems and processes that will be affected under different scenarios and formulate back-up plans. We require these contingency plans and procedures to be in place by the end of the first quarter of 1999, and validated by June 1999. I am encouraged that banks and financial institutions acknowledge the importance of contingency planning and have taken the necessary steps.

6   The financial sector's preparations would have been incomplete if "dependencies" in the public infrastructure had been overlooked. Banks and financial institutions are heavily reliant on critical infrastructure such as payment, water, power, and telecommunications systems. It was essential that they too were Y2K -ready. Our infrastructure service providers recognise this vital link. In fact, they completed the process of problem identification, systems renovation and testing as early as October 1998. This included a review of contingency plans. The Stock Exchange of Singapore and the Singapore International Monetary Exchange have also successfully completed their Y2K external tests with members.

7   Internally, MAS has also verified the Y2K compliance of its payment and clearing facilities. Our industry-wide test in November last year confirmed the Y2K compliance of MAS' real time gross settlement system, or MEPS. The test covered all aspects of MEPS, including inter-bank funds transfer transactions, Singapore Government Securities transactions, inter-bank GIRO transactions as well as cheque clearing operations.

8   In February this year, we carried out a test on MASNET, a key communications network operated by the MAS. I am pleased to say that MASNET is also Y2K-compliant. This is important as MASNET is widely used and has linkages with the Stock Exchange of Singapore, the Central Provident Fund Board, the Board of Commissioners of Currency Singapore, Land Transport Authority, Ministry of Manpower, and the Institute of Banking and Finance.

9  . The major remaining challenge is cross-border testing of system interfaces and dependencies with international payment centres or counterparties. We will be participating in the "Global Payment System Test" initiated by the New York Clearing House. This test will focus on the Y2K-compliance of cross-border payments systems and involves several countries. We will be one of three Asian countries participating.

Preparing the Industry

10   These achievements were the result of combined efforts by all market players. For MAS, besides being a supervisor and payment centre, we also play the role of facilitator and mediator.

11   We began strategic plans to prepare the financial sector in early 1997. From the outset, we emphasised that senior management or the board of directors must be ultimately responsible for their institutions' Year 2000 preparations. We conducted two surveys last year to gauge management's commitment and level of readiness. The results were encouraging. Almost all financial institutions in Singapore indicated they would be operationally ready by the Year 2000.

12   But by whose standards and measure were they ready? So, in May 1998, we decided to conduct on-site assessments of financial institutions' Year 2000 readiness. We felt that off-site monitoring was not enough. It is only by walking through Year 2K programs, speaking to institutions' Year 2K project managers, and seeing for ourselves the organization of resources and decision-making processes, that we could have a better sense of the financial industry's preparations. On-site inspections have also enabled us to identify with a greater degree of confidence those institutions lagging in their Year 2K efforts. We are very pleased with the results. Most institutions met our regulatory expectations.

13   Having verified the extent of institutions' Year 2K preparations, we embarked on the second phase of our supervisory programme. We asked banks and financial institutions to submit quarterly Year 2K progress reports. These reports were adapted and expanded from Global2K's disclosure template. We then asked selected banks and financial institutions to conduct independent assessments of their Year 2000 readiness. They have the choice of engaging IT consultants, external or internal auditors. These independent assessments must be submitted to MAS by mid-September 1999, which is the final milestone in the series of Y2K deadlines we have set for the industry. Those institutions which fail to meet this deadline will be singled out for supervisory action. I expect there will be very few such institutions.

14   But MAS' role in ensuring Year 2000 readiness in the financial sector extends beyond supervision. Let me briefly highlight four areas.

To Foster Industry Co-operation and Co-ordination

15   One of our roles is to galvanise institutions to work co-operatively with one another. This applies at three levels.

16   At the first level, financial institutions need to understand that the Year 2K conversion process requires the full support of all departments and levels within the organisation. The industry's initial preparations were characterised by a certain degree of inertia. There was a common perception that the Year 2K problem was a technical problem which did not concern the business units or senior management. In addition to supervisory guidelines and periodic audit checks, MAS sought to raise awareness of the Year 2K problem through a series of presentations to the industry. I am happy to note that there has been a paradigm shift within the industry in terms of the commitment to tackling the issue at the management level.

17   At the second level, financial institutions had to recognise that overcoming the Year 2K problem was a collaborative effort that required mobilising and co-ordinating resources across a host of differing institutions and interests. For this reason, MAS set up the Financial Sector Year 2000 Steering Committee and Task Force, comprising representatives from the banking, insurance, and securities industries. The Steering Committee and Task Force have served as important fora in helping to understand one another's perspectives, share experiences, and establish best practices. These meetings have also been instrumental in co-ordinating industry-wide initiatives such as testing and contingency planning.

18   The third level is cross-sectoral co-operation. Most financial market participants are not accustomed to gathering extensive information from other sectors. Yet financial firms depend critically on the proper functioning of sectors such as telecommunications, transportation, water, electric power generation, and even government services. The National Computer Board (NCB) co-ordinates efforts by every national infrastructure service provider as well as government agency, and effectively drives the national effort towards Year 2K readiness in Singapore. MAS participates actively in joint meetings organised by the NCB and voices the interests of the financial sector. At the same time, MAS is apprised of efforts being undertaken by various service providers. These are in turn communicated to the industry.

To Promote Communication and Manage Public Confidence

19   The second way in which MAS has facilitated the industry's preparations is in managing public confidence. Already the Year 2K preparations of financial institutions are becoming the subject of ever-more intense scrutiny by the media and the public.

20   Publicity on the Y2K issue will create pressure for maximum transparency in all areas of operations and services. Transparency enables customers to make better-informed decisions and counterparties to feel comfortable with their transactions. In short, it enhances confidence in financial processes throughout the financial system. Indeed, the inadequacy of information may feed negative perceptions in the marketplace. In the extreme, the absence of information could lead to a "flight to quality". Unless we continue to make steady progress in preparing for the century change and communicate clearly how we are doing, firms and indeed entire countries may find themselves shunned by investors if they are not seen to be making sufficient progress toward resolving this problem.

21   Disclosure must therefore form an integral part of Y2K preparations. However, an important challenge in disclosure is the question of what information should be disclosed and when. This is why MAS and the various industry associations in Singapore are currently working on a communications programme. It aims to inform, educate and assure the wider public. It is vital to have a well thought-out action plan that addresses public concerns on the one hand, while not sounding too prophetic or fatalistic on the other.

To Ensure Business Continuity

22   The third area in which MAS can play a role is in helping to ensure business continuity. No one can predict with certainty what exactly will happen on the first day of business next year. But one way of coping with this uncertainty is through scenario planning that will help us develop policy responses that are robust across different outcomes.

23   Internally, we have mapped out possible Y2K events or scenarios which could potentially have systemic ramifications. Foremost is the risk of a cash shortage. We have been working with the Board of Commissioners of Currency of Singapore, or BCCS, on this issue. I would like to assure you that there are sufficient resources to meet the needs of the financial community in the unlikely event of a surge in demand for cash. To give you an illustration, the BCCS maintains a two-year buffer stock of notes and coins, amounting to some S$26 billion.

To Isolate or Limit Systemic Risks

24   I will now touch on our fourth and last role - that of an enforcement authority.

25   If an institution is judged to be deficient or lagging in its progress, we have so far communicated our findings to its senior management and, for the case of foreign institutions, to their parent supervisor as well. We have also called for the submission of detailed plans and formal responses to the deficiencies noted. Naturally, these institutions will be subject to increased monitoring and supervisory review. This approach has paid off. The number of institutions ranked "Unsatisfactory" has gradually declined, from seventeen in December 1998, to only eight in February 1999.

26   But it will be unrealistic to assume that all financial institutions will be ready for Year 2000. We will therefore impose operational restrictions on financial institutions judged to be behind schedule. We have mapped out a series of supervisory actions that range from increasing liquidity requirements to the temporary suspension of operations. The aim is to insulate the rest of the system from those institutions which are not ready for Year 2000.

Bank Holiday

27   Before I conclude, I would like to touch on the issue of whether the 31st of December 1999, 3rd or 4th of January 2000 should be declared bank holidays. As you know, none of these days is a scheduled holiday in Singapore. We will consider the pros and cons of declaring a bank holiday very carefully.

28   There are some merits in declaring a bank holiday, especially on 31st December 1999 as proposed by the ABS. The extended holiday period could allow firms to make an early start in completing year-end processing and back-ups. Processing activities, which usually run continuously into the following day, would not be disrupted as a result of the cross over to the next century. This would at least ensure the integrity of data.

29   But there are serious drawbacks as well in having an extended holiday period. First, processing activities will have to be postponed to days where capacity is already over-stretched. This could introduce serious operational, settlement and other risks. Second, we could be sending the wrong message that the industry is not ready or confident of itself. This could in turn lead to panic, precipitating in the extreme, capital flight or liquidity squeeze. Third, the extra time would not make any difference at all if we are not already Y2K compliant by then.

30   We are confident that our financial system will be ready for Year 2000. But the issue of bank holidays is one we need to consult the industry actively on. The Financial Sector Year 2000 Steering Committee is studying this issue carefully and will take account of what other major financial centres will be doing in this regard.

Conclusion

31   In conclusion, let me say again that I am very encouraged by your enthusiasm and participation in this conference. We now see greater interest and co-operation in resolving the Year 2K problem. Resources are also less scarce and information more available. There is every reason to believe that Singapore's financial sector can and will enter the Year 2000 smoothly.

32   Thank you.