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Document 26 of 29.

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MARCH 11, 1999, THURSDAY

SECTION: IN THE NEWS

LENGTH: 6625 words

HEADLINE: PREPARED TESTIMONY OF JOHN H. MCGUCKIN, JR.
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
UNION BANK OF CALIFORNIA, SAN FRANCISCO, CALIFORNIA
ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION
BEFORE THE SENATE SPECIAL COMMITTEE ON THE YEAR 2000 TECHNOLOGY
PROBLEM

BODY:

Mr. Chairman, I am John H. McGuckin, Jr., Executive Vice President and General Counsel of Union Bank of California, and am testifying on behalf of the American Bankers Association (ABA). The ABA brings together all categories of banking institutions to best represent the interests of this rapidly changing industry. Its membership - which includes community, regional and money center banks and holding companies, as well as savings associations, trust companies and savings banks - makes ABA the largest banking trade association in the country.
I am pleased to be here today to discuss what the banking industry is doing to address the Year 2000 computer problem (Y2K). These hearings are very important because information about the Y2K problem - and what the government and industry are doing to meet this challenge - is critical to maintaining confidence in our economy. I would like to begin by thanking Senator Bennett and Senator Dodd, for your outstanding leadership on the Y2K issue. You have both done much over the past two years to encourage a vigorous, constructive response to the Y2K challenge in both the public and private sectors. On behalf of ABA, I would also like to thank the Senators who have recognized the importance of addressing the threat of Y2K litigation before it becomes a harsh reality. In particular, I would like to commend the efforts of Senator John McCain, Senator Orrin Hatch, Senator Dianne Feinstein, and other co-sponsors of Y2K legislation introduced in the Senate this year.
The Y2K challenge essentially has two components. The first is technology - making sure that software and hardware systems will work on January 1, 2000 and beyond. The second is communication - making sure the public is knowledgeable about the problem and what is being done to solve it. Even if the technical problems are fully resolved, people need to know about it. If nothing is said, the information void will surely be filled with misleading and provocative stories that will create undue anxiety, and lead to bad decisions. The problems created by adverse public reaction or panic could be far worse than the actual problem. The news media, government, private industry, bankers, and all other stakeholders must join forces to stabilize the public opinion, and manage expectations.
The banking industry is working hard at solving both aspects of the Y2K problem. Since 1995, the banking industry has devoted millions of man-hours and billions of dollars to addressing Y2K. The banking industry is well into the testing period for all critical systems, working closely the Federal Reserve and other federal bank regulators. Our progress is fight on track. The ABA and individual banks have also done a tremendous amount of work to keep our customers informed about our progress. We believe this communications effort is right on track, too.
At Union Bank of California, Y2K has been identified as the single most critical project to be completed this year. Its criticality has been communicated through senior management, right down to every employee and business manager. Nothing at our bank has higher priority or greater scrutiny than this important project.
At Union Bank of California, we are preparing for the century change with a comprehensive enterprise-wide Year 2000 Program. We have identified all of the major systems and have sought external and internal resources to renovate and test the systems. We are testing purchased software, internally developed systems and systems supported by external parties as part of the program. We are evaluating customers and vendors that have significant relationships with us to determine whether they are adequately prepared for year 2000. In addition, we are developing contingency plans to reduce the impact of some potential events that may occur.
Our Year 2000 Program is comprised of numerous individual projects that address the following broad areas: data processing systems; telecommunications and data networks; building facilities and security systems; vendor risk; customer risk; contingency planning; and communications. We have identified over 2000 individual projects. The projects vary in size, importance and materiality from large undertakings, such as remediating complicated data systems, to smaller, but still important, projects, such as installing compliant computer utility systems or assuring that building equipment will perform properly. The program continues to evolve as we identify new projects to keep up with the increased understanding of year 2000 implications and evolving external requirements. Virtually all of the projects currently identified have begun, and approximately 2/3 have been completed.
At Union Bank of California, our Year 2000 Program Office reports on progress monthly to our Executive Management Committee and quarterly to the Audit and Examination Committee of our Board of Directors. Other committees of the Board of Directors receive periodic reports on Y2K preparedness in their areas of oversight responsibility. Our internal Audit Division, the National Bank Examiners from the Comptroller of the Currency and examiners of the Federal Reserve Bank of San Francisco regularly assess our year 2000 preparations and report to the Audit and Examination Committee.
The banking industry is unique in that it has extensive levels of federal and state regulation and examination. We have worked closely with bank regulators to address all aspects of the Y2K issue. The results of the Y2K compliance examinations have been very positive. We believe it would be very helpful for the bank regulators to comment publicly the industry's readiness for Y2K, and remind the public of all that is being accomplished.
There are four key messages that I would like to leave with the Committee today:
-- The banking industry is on track meeting critical deadlines;
-- Educating our customers and the public generally is vital;
-- The safest place for customers' money is in the bank; and
-- Congress should enact legislation to encourage businesses to devote resources to remediation, not litigation.
Before turning to these points, I want to take a moment to focus on why these issues are so important to the banking industry. We take our role in the economy and in each community we serve very seriously. Our business is built on the trust established with our customers over many decades. Maintaining that trust is no small matter to us. When customers put money in a bank, they need to feel that their funds are secure, accessible when they need them, and financial transactions will be completed as expected. It is, therefore, no surprise that we in the banking industry understand that so much is at stake in addressing the Y2K problem.
On a larger scale, our national economy relies on a smoothly functioning payment system. It's something the general public takes for granted because our payment system is so efficient, accurate and easy to use. Assuring this high level of performance requires the collective efforts of many participants: banks, thrifts, brokerage firms, regional clearinghouses, and the Federal Reserve.

Careful planning, correcting and testing is crucial to minimize any disruptions from the century date change. But we must be realistic: it is inevitable that some glitches will occur. Contingency planning, therefore, must be and is an integral part of the process. In the case of the banking industry, our contingency plans are examined by the bank regulators. We intend to be as prepared as possible for any eventuality.
Preparedness, however, goes well beyond the banking and financial sector. The tightly woven fabric of our economy means that businesses, households and government must work together. Success depends upon the efforts of all sectors of the economy, including energy, telecommunications, transportation, public utilities, retail services, etc. Bankers have reached out to other industries, as well as our customers, to ensure that we all come through this challenge intact.
I. Technology: The banking industry is on track meeting critical deadlines
Many banks began their Y2K risk assessment efforts as early as 1995. The cost of assessing, correcting, testing and contingency planning will easily exceed $9 billion, in the banking industry alone. The goal oft his massive commitment of effort and resources is to provide a smooth transition of banking and financial services into the 21st century with minimal disruptions.
The Y2K strategy involves awareness, assessment, renovation, validation and implementation. Key components of these broad strategic areas include the assessing of business risks, conducting due diligence on service providers and software vendors, analyzing the impact on customers, and assuring customer awareness of progress in addressing Y2K concerns.
At Union Bank of California, we plan to complete all projects currently identified prior to the year 2000. The most important projects are the "mission critical" application systems upon which we rely for our principal business functions. We have renovated and tested all these systems. However, outside services provide three of them. Our outside service provider has renovated and tested each of these systems, but we still need to validate them ourselves. In addition to testing individual systems, we have begun integrated contingency testing of our "mission critical" and many other systems in a separate computer environment where dates are set forward in order to identify and correct problems that might not otherwise become evident until the end of the century.
While we do not significantly rely on "embedded technology", that is microprocessorcontrol devices as opposed to multi-purpose computers, in our critical processes, all building facilities are being evaluated, and we expect all systems using embedded technology be confirmed as year 2000 ready by June, 1999.
We rely on vendors and customers, and we are addressing year 2000 issues with both groups. We have identified over 300 vendors and have made inquiries about their year 2000 readiness plans and status.
We also rely on our customers to make necessary preparations for the year 2000 so that their business operations will not be interrupted, thus threatening their ability to honor their financial commitments. We have identified over 2,500 borrowers, capital market counter parties, funding sources and large depositors that constitute our customers having financial volumes sufficiently large to warrant our inquiry and assessment of their year 2000 preparation.
One of the greatest challenges to business managers is identifying and then addressing the vast number of outside toucho a business unit. These include vendors, suppliers, service providers, and a host of other businesses that touch us from outside on a daily basis. Ongoing communication and monitoring of these partners is critical to the success of the Y2K effort.
Regulatory Oversight
The banking industry is unique in that it is a highly regulated industry at both the state and federal level. Since 1997, the banking industry has worked with the regulators in assessing the extent of the Y2K problem and developing a three-phase plan of attack.1 The public is not aware of the tremendous joint efforts between the banking industry and government regulators to meet the Y2K challenge. During phase one, completed June 30, 1998, federal bank supervisors conducted on-site examinations of every depository institution and rated them on their remediation plans and written testing strategies. Regulators also conducted on-site examinations of firms providing data processing and system services.
During phase two, supervisors are examining banks for how well the testing of critical systems is progressing and on contingency plan development. This is critical as it measures the success of the remediation efforts. For banks with their own internal systems, testing was to be completed by the end of last year. By March 31, 1999, banks relying on outside service providers should have testing completed. All institutions should also have initiated external testing with customers, other banks and payment system providers.
The results of on-site, phase one and phase two examinations show that the banking industry is right on track meeting its goals. As of December 31, 1998, 97 percent of the industry held the highest rating and only 17 institutions - out of more than 1 O, 000 banks and thrifts received unsatisfactory ratings. These poorly rated institutions are being closely monitored by the regulatory agencies.
Phase three includes final testing of internal and third-party systems and testing with the Federal Reserve and clearing systems participants. Phase three will run from April 1 through December 31, 1999, with a critical deadline of June 30 for completion of testing validation and implementation of remediated systems. After June 30, institutions will continue to monitor and update contingency plans as may be required by external developments, and monitor customer and counter-party risk. Agency examiners will continue to check on bank testing implementation and contingency plans, and, where needed, with continued on-site reviews.
Testing with the Federal Reserve and clearing system participants is very important. Starting last summer, the Fed established dedicated times for banks to test the operability of systems for Y2K compliance. Systems tested include Federal Funds Transfer, Fed Automated Clearinghouse (ACH) transactions, check processing and other payment systems. The Fed reports that more than 6,000 banks have already conducted tests of these systems. Additional testing by the banks will be happening throughout the first half of 1999.
Credit and debit card systems have already been tested for Y2K compliance and adjustments to software and hardware have been made. Many cards in use today have expiration dates in the year 2000 or beyond. Systems needed to be ready to recognize these cards as valid when they were issued last year. I am happy to report that the transition was made so smoothly and with so few problems that the public was largely unaware that any changes had been made.
Contingency Planning
While we believe our systems will be ready for the century date change, we nonetheless are actively developing Y2K contingency plans. One reason contingency planning is so important is because banks rely on a whole host of outside service providers, which are undertaking their own Y2K remediation over which we have little control. For example, utility companies provideelectricity for banking offices, branches and ATM machines; telecommunications facilitates customer inquiries of financial records and verifies transactions at ATM machines and at point-ofsale terminals (for credit cards and debit cards) in retail establishments. And banks rely on armored cars to deliver cash to bank branches and ATMs, and other transportation services to deliver checks for clearing at large banks or through the Federal Reserve. We are asking questions of these providers and testing compatibility of remediated systems. At Union Bank of California, we are developing year 2000 remediation contingency plans and business resumption contingency plans specific to the year 2000. Remediation contingency plans address the actions we would take if the current approach to remediating a system is falling behind schedule or otherwise appears in jeopardy of failing to deliver a year 2000-ready system when needed. Business resumption contingency plans address the actions that we would take if critical business functions cannot be carried out in a normal matter upon entering the next century due to system or supplier failure.

We are developing plans for system-wide or regional failures and for individual critical operating units when necessary. We expect to complete development of plans for the operating units and their validation in June 1999. We expect to complete development of plans to address system-wide and regional failures and their validation in September 1999.
Having plans to deal with unexpected events is nothing new for the banking industry. Every bank has business recovery plans in the event of natural disasters such as hurricanes, earthquakes, tornadoes, floods and fires. When those occasions arise, the bank is typically the first business in the community to be back up and running. Here are just a few examples of this:
-- The two-dozen banks in the Grand Forks, North Dakota area got their banks up and running in April 1997 within days of the worst flooding by the Red River in this century. Banks reopened in trailers, truck stops and grocery stores to keep the cash flowing.
-- On the morning of December 8, 1998, construction equipment severed a cable in suburban San Francisco, causing a massive regional power outage across Northern California. While the power company worked to repair the damage, Bay Area banks, including Union Bank of California, continued to operate and provide customer services. In fact, some banks took advantage of the event as an opportunity to implement portions of their Y2K contingency plan designed to deal with power outages.
-- In Des Moines in 1993, one bank avoided disruptions by moving most of its 750 employees to temporary offices after rising waters flooded out four of its mortgage operations' downtown buildings. And as a levee threatened to burst down-river in Kansas City, Missouri, one bank CEO rented a tractor trailer and with his 23 employees, trucked vital bank records and equipment to higher ground.
-- After Hurricane Andrew roared through south Florida, bankers hauled in portable generators, transferred employees from other parts of the state and quickly made available several billion dollars in storm-related emergency loans.
-- Banks recovered quickly after the World Trade Center bombing in New York. Several banks, including Union Bank of California's New York subsidiary, continued to process payments to corporations around the globe despite the disaster. Within hours these banks shifted their processing to off-site disaster-recovery locations where, over the weekend, employees worked around the clock to complete the processing.
-- Most banks reopened within a day or two of the powerful 1994 Los Angeles/Northridge earthquake, including our own branches at Union Bank of California. One bank's credit-card processing facility near the epicenter suffered structural damage, so the bank moved to vacant offices downtown, leased buses to transport some 520 employees to the new location and kept customer services flowing.
-- When fire swept through the 62-story First Interstate headquarters building in Los Angeles in 1988, key bank employees quickly implemented the bank's new $1.5 million disaster plan in an underground command center seven blocks away. The CEO said later that the only customers affected by the huge fire were those who banked in the headquarters' first-floor branch.
-- A detailed disaster plan made it possible for bank customers to continue to get cash and make deposits after a Thanksgiving Day fire in 1982 caused $75 million in damage, destroying the Minneapolis headquarters of Norwest Bank. Two days later a Norwest ad read: "It takes more than a five-alarm fire to slow us down."
The ABA has published its own guidance for banks to follow as they proceed through the contingency planning process, ABA Millennium Readiness Series, Year 2000 Contingency Planning Program Management.
II. Beyond Technology: Maintaining Consumer Confidence
The steps banks are taking now are intended to make sure our systems will work when the calendar changes. Perhaps the bigger challenge is maintaining public confidence. We believe that Congress has a critical role to play, as do bankers, in keeping consumers informed about what is being done and what they can do to prepare for the century date change. People want and need to know that their money will be safe, their records secure and their banks open to serve them next January.
Consumer education is vital. Recent focus group research by ABA indicates that consumers, while concerned about Y2K, are not overly alarmed by the prospect of the calendar change. However, we know there will be tremendous speculation between now and January 1 about what will work and what will not work. Many consumers we met with did not know that the federal financial regulators are examining every bank multiple times to test compliance on the full range of systems, software, backup and other contingency plans. The fact that bank regulators are watching over banks' Y2K efforts is good news to consumers. The fact that the Federal Reserve is printing billions of extra dollars and is working to expedite cash delivery to banks from the current three days to same-day delivery is also good news to consumers. And the fact that deposits are federally-insured up to $100,000 and backed up by the full faith and credit of the federal government is good news as well. The message is that the American banking industry will be ready.
One unique factor affecting the Y2K issue that is different than other historical events, is the advent and widespread usage of the Internet as an information medium. News reported on the Internet surrounding the Y2K issue ranges from sensible advice and preparation, to absolute propaganda. One problem with the proliferation of the Internet is the inability of many consumers to separate fact from fantasy. Many people have not realized that not everything printed on the Internet is true. There is much irrational, irrelevant and misleading information being circulated regarding this issue. Therefore, there must be an equally aggressive effort to dispense facts and dispel fiction.
This raises another critical point. Several well-intentioned organizations are advising consumers to withdraw extra cash "just to be on the safe side." In fact, it is anything but the safe side. People need to think twice about how much money they want to be carrying around with them and keeping in their house. Personal safety is each individual's responsibility. Exploiting the year change will tempt many people, from champagne vendors to petty thieves, who are well aware that people will be withdrawing extra money. There has already been one publicized report of $20,000 withdrawn from a bank in preparation for Y2K, buried in the backyard - and stolen. The safe side? Not at all.
The message is simple: The safest place for customers' money is in the bank. The depositor does not have to worry about theft or loss, and deposits are FDIC-insured. The consumers we spoke to in our focus groups were concerned about the accuracy of their bank records and getting access to their cash. In terms of accuracy, customers get statements of their accounts monthly. Banks reconcile their books daily and have extensive backup records to preserve the financial data. In addition, banks will be taking extra precautions with manual reports and backups during the calendar change. At Union Bank of California, in addition to regular monthly statements, our customers are able to obtain activity statements either from the ATM or by requesting statements through telephone banking services, for account reconciliation at any time should it be necessary.
How much cash will people need? Probably about as much as they would need on any other holiday weekend. Personal checks are Y2K-compliant and will work anywhere - in the bank and at a wide range of retailers and service providers, both in- and out-of-state. If people are still concerned about their cash needs, they can put a little extra money in their checking account - their FDIC-insured checking account. Would you want to be carrying around a lot of extra cash? Would you want your elderly relatives to be carrying around a lot of extra cash? I certainly would not.
There are common sense steps consumers can take to prepare for the century date change. Here are some of the prudent measures that banks around the country have been advising their customers to take:
Read the information their bank sends them about Y2K. Please call the bank if they have any questions at all. Trust, but verify, in other words.* Hold onto bank statements, bank receipts, canceled checks and other financial records, especially for the months leading up to January 2000.
-- For customers that bank on-line, make sure home computers are Y2K- ready. Check with computer and software manufacturers for details on how to do this. And visit your bank's website to learn more about its Y2K preparation.

-- Copy important financial records kept on home computers to a back- up disk.
-- Do not turn your money over to anyone who promises to hold it or "keep it safe" through the date change.
-- Withdraw only as much cash as would be needed for any other holiday weekend.
To maintain consumer confidence in the banking industry, ABA is communicating with bankers, consumers and the media. We have produced three informational videos for banks to use with their customers - one designed for retail customers, a second for a bank's tellers and other front-line personnel, and a third for small business customers. We send a monthly fax newsletter to banks, which contains updates, helpful tips and shares ideas that have worked for other banks. We have provided ads, a Y2K customer communications kit to help bankers reach out to their customers, telephone seminars on a wide range of aspects of the Y2K challenge, a Y2K Project Management Manual and a Y2K Contingency Plan Manual. The latest piece in this continuing series is a Y2K Instruction Booklet containing tips to help banks comply, communicate and cope. ABA's web site - www.aba.com - provides our members with other Y2K resources and information. Additionally, many banks maintain websites to inform their customers of the progress being made by the bank's Y2K project team.
In December, ABA ran a full-page ad in USA Today and beamed a video news release via satellite to more than 700 television stations around the country to reach out directly to consumers. The news release included part of an interview with John Koskinen, chairman of the President's Council on Year 2000 Conversion, who has said the banking industry is "ahead of the curve" in Y2K preparedness.
ABA has also been holding media briefings jointly in Washington with the other financial trade groups, and around the country in collaboration with the state bankers associations. We are also doing special media tours, making bankers available to discuss Y2K issues on TV and radio.
Customer communication is a must for every bank in the country. After all, every customer wants to know about their particular bank. No one knows how consumers will behave leading up to January 1, and we will continue to conduct research to track their behavior and their level of concern. One thing is sure: they need information, sound advice and reassurance - from their bank, the banking industry, the federal banking regulators, and the U.S. Congress.
III. Why Y2K Legislation is Needed
Congress, government and regulators have a special role to play in disseminating accurate information and creating an environment for open discussion. The bill enacted by Congress last year, the Year 2000 Information and Readiness Disclosure Act (P.L. 105-271), was an important first step in this direction. It encouraged information sharing among parties who are actually working on Y2K problems, by providing legal protection for their disclosures of technical information. Further, it helps to ensure that disclosure of Y2K- related technical information will not become the subject of lawsuits.
Congress can make a difference this year as well. In particular, we urge Congress to consider broader Y2K liability issues, such as disruption liability, punitive damages, class actions, and alternative dispute resolution. The cost of doing nothing may be considerable. As noted above, the industry has already spent billions of dollars on Y2K remediation efforts. Industry consultants further project that $2 million could be spent on litigation for every $1 million spent on system remediation.
Business survival depends on remediation. Banks and businesses have every incentive to fix the problem so that they can stay in business and continue to serve their customers. Speaking for the banking industry, it is clear that Y2K readiness is a competitive issue. Banks want to keep our customers and build our businesses, and to do so we must be ready for Y2K. We do not need the threat of litigation as a stick to make us remediate. In fact, the litigation threat is an impediment, a distraction from the tremendous task at hand. Congress should keep this in mind as opponents of Y2K legislation allege that proposals to reduce the litigation threat will somehow remove the incentives to achieve Y2K readiness. Nothing is further from the truth.
Here is a sampling of Y2K remediation and litigation cost estimates, cited by Representative David T. Dreier during the recent introduction of his Y2K liability legislation, H.R. 775, the Year 2000 Readiness and Responsibility Act:
"What we do know is that the Y2K event represents the largest computing project that the information technology industry has faced in the 50-year history of its existence. It is estimated that the global cost for remedying the problem could be as high as $600 billion. Possible litigation after the event could reach $1.4 trillion." Mr. Joseph E. Connor, United Nations Under-Secretary- General for Management, December 11, 1998.
"Estimates of the worldwide cost to cure the problem could range from $600 billion to $1 trillion. Companies would normally devote these financial resources to improving profits, developing new products, hiring or sweetening paychecks."
Knight Ridder Newspapers, December 1, 1998"The Gartner Group estimates that litigation costs over Y2K service and product failures, both real and imagined, could soar to $1 trillion or more." TIME, June 15, 1998
"The final cost of the Millennium Challenge, however, may well exceed $1 trillion. The reason for this is that most estimates only incorporate the direct cost of becoming 'Year 2000 compliant.' Little attention is paid to the costs associated with project management, delayed upgrades, diverted resources and potential litigation."
"The Millennium Challenge," a report published by the Merrill Lynch Foram, July 1997
"The amount of legal litigation associated with Year 2000 has been estimated by Giga Information Group to be $2 to $3 for every dollar spent fixing the problems. With the estimated size of the market for Year 2000 ranging from $200 billion to $600 billion, the associated legal costs could easily near or exceed $1 trillion."
Ann K. Coffou, Managing Director, Giga Year 2000 Relevance Service, before the U.S. House Committee on Science, Subcommittee on Technology March 20, 1997
The banking industry is in a unique position regarding potential Y2K- related litigation. Banks of all sizes serve as financial intermediaries in virtually every transaction in the economy, from retail transactions to trade finance, real estate conveyancing, business credit lines, investment advisory services, and securities trading and settlement. If such transactions or services become disrupted in January 2000 for any reason, banks will become the immediate targets for litigation because of their perceived "deep pocket" status, regardless of their role in any Y2K disruptions underlying the claims.
As has been noted by the federal banking regulators, some federal consumer protection laws limit a financial institution's civil liability to third parties (i.e., customers and other private litigants) for unintentional violations that result from "bona fide errors," provided the institution establishes by a preponderance of the evidence that it has maintained procedures reasonably adapted to avoid such errors. However, these provisions have been rarely invoked and have been narrowly interpreted when analyzed by the courts.
Without clarification by Congress, however, it is doubtful whether the "bona fide error" provisions would provide any protection for financial institutions against frivolous or abusive litigation. Absent such clarification, insured depositor institutions could face a wave of speculative class action claims by professional litigators seeking damages from alleged Y2K-related disruptions of consumer financial services.
IV. Guiding Principles for Y2K Legislation
Starting last year, the ABA has been working with our members and with a multi-sector coalition of more than 60 industry groups 2 to formulate legislative proposals that would encourage Y2K problem solving, and discourage speculative litigation. ABA strongly urges Congress to consider the following principles in enacting legislation that would create a rational framework for Y2K dispute resolution.

Here are a set of principles that we believe should guide Y2K legislation:
-- Contracts Prevail: Existing contracts should be the first point of reference to define the rights and obligations of parties to any Y2K dispute.
-- Cure Period: Potential defendants, such as product vendors or service providers, should have the opportunity to cure a Y2K problem before a lawsuit is filed. Parties need to devote their finite resources to remediation, not litigation.
-- Mediate not Litigate: Parties should be encouraged to resolve disagreements through alternatives to litigation. Likewise, parties with legitimate claims must have their rights protected, but abusive and frivolous claims should be discouraged.
-- Mitigation: Claimants should have a duty to mitigate damages they could reasonably have avoided. This is a longstanding principle of law that needs to be applied to Y2K claims.
-- Specific Claims: In the course of pre-trial dispute resolution or filing a lawsuit, the plaintiff should be required to identify the material defect and state the specific remedy sought, rather than submitting vague or broad claims which obscure the chances of fixing the problem.
-- Damage Limits: Limit Y2K contract litigation to actual direct damages, and place limits on consequential or punitive damages, unless parties have agreed otherwise by written contract. This would not apply to personal injury or fraud claims.
-- Evidence of Efforts: Provide for "reasonable efforts" evidence to be considered by the tryer of fact in resolving contract or tort claims. Such an evidentiary framework allows parties to establish their good faith and due diligence in achieving Y2K readiness.
-- Proportionate Liability: Liability of a defendant should be based on their proportionate fault in causing a Y2K disruption. Proportionate liability should be applied in tort claims, rather than joint and several liability, which unfairly targets "deep pocket" defendants who may not be primarily responsible for the harm. A federal comparative negligence rule would allow courts to apportion liability among multiple parties.
-- Speculative Suits: Discourage speculative class action lawsuits through minimum claim requirements, notice procedures, and clarifying federal diversity jurisdiction.
-- Sector-Neutral: Legislation should be sector-neutral, with no sector of the economy or level of government obtaining special exemptions not available to other entities.
-- Protect Legitimate Claims: Creating a framework for rational resolution of Y2K-related disputes is important to every sector of the economy. Otherwise, the judicial system is likely to become clogged with frivolous suits, thus delaying resolution of legitimate claims.
These are serious issues which demand a bipartisan response. Many of these principles have been incorporated into Y2K liability proposals which are now awaiting action by Congress:
S. 96
The Y2K Act Co-sponsors include: Sen. John McCain (R-Ariz.), Sen. Spencer Abraham (R-Mich.), Sen. Bill Frist (R-Tenn.), Sen. Slade Gorton (R-Wash.)
S. 461
The Year 2000 Fairness and Responsibility Act Co-sponsors include: Sen. Orrin Hatch (R-Utah), Sen. Dianne Feinstein (D-Calif.) Sen. Mitch McConnell (R-Ky.)
H.R. 775
The Year 2000 Readiness and Responsibility Act Co-sponsors include: Rep. David Dreier (R-Calif.), Rep. Tom Davis (R-Va.) Rep. Jim Moran (D-Va.), Rep. Bud Cramer (D-Ala.), Rep. Chris Cox (R-Calif.)
Each of these proposals incorporates many of the provisions that ABA considers to be vital for promoting Y2K problem-solving and claim resolution across economic sectors. The ABA continues to work with the multi-sector coalition to secure passage in Congress of a bill that reflects the principles outlined above, and encourages remediation over litigation to meet the Y2K challenge.
VI. Conclusion
Mr. Chairman, the banking industry is working diligently to meet the Y2K challenge, and is doing so with a wide ranging response that sets an example for other industries to follow. Financial institutions across the U.S. are implementing Y2K project plans that are vast in scope, complexity and scale. However, we do not need the threat of litigation spurring us on. Banks and businesses already have the greatest incentive to finish the job for Y2K readiness, and that incentive is the goal of survival as a viable business. Banks are devoting tremendous resources to overcoming the challenges of Y2K. But entire segments of the economy and the judicial system could be rocked by the ordeal of protracted Y2K litigation. We urge Congress to take action to prevent the potential derailing of the massive Y2K remediation effort into a litigation tangle of unprecedented scope and cost.Thank you very much for the opportunity to address this committee. I would be glad to answer any questions.
FOOTNOTES:
l The Federal Reserve, the Office of the Comptroller of the Currency (which regulates national banks), the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration work jointly on key regulatory and supervisory issues through what is known as the Federal Financial Institutions Examination Council, or FFIEC. Through this cooperative regulatory effort, the FFIEC has played an important role in promoting Y2K education and communication among bankers and service providers. For example, representatives of the banking industry trade groups meet on a quarterly basis in Washington with staff members from the various Y2K teams of the FFIEC member agencies to discuss ongoing efforts, upcoming programs and publications, and to exchange news on Y2K developments in general. The banking agencies have also offered countless regional seminars on Y2K issues, as provided for in the "Examination Parity and Year 2000 Readiness for Financial Institutions Act." We are extremely pleased at these joint efforts and the agencies should be commended for their work in this area. 2 Since the summer of 1998, a multi-sector coalition of industry groups, known as the Year 2000 Industry Coalition, has worked on Y2K legislation, both disclosure issues and broader liability issues. Among the participants in the coalition besides ABA are: National Association of Manufacturers, Edison Electric Institute, Information Technology Association of America, U.S. Chamber of Commerce, National Federation of Independent Businesses, National Retail Federation, American Insurance Association, Business Software Alliance, Securities Industry Association, and more than 60 other trade and industry groups representing all economic sectors.
END

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