In closing this section of my statement, I do not think it is possible to over-emphasize the importance of testing to help improve readiness. To illustrate this point, I would like to draw on our experiences with Fedwire, the Federal Reserve’s wholesale interbank payments system. Much of the current Fedwire software application was written in the last five years, with the Y2K problem in mind. Nevertheless, some of the older software code that was carried over into the new application was not Y2K-compliant. Without the rigorous internal Y2K testing program that the Federal Reserve adopted, our Y2K remediation efforts might, therefore, have been incomplete. I think of this experience whenever I hear it said that some countries are immune to Y2K because they have only recently introduced information technology and that recent software programs are less affected by Y2K. I ask whether those programs have truly been thoroughly tested for Y2K compliance. Contingency Planning Efforts The third major role of the Joint Year 2000 Council will relate to contingency planning. In this context, I should note that contingency planning is something that most financial market authorities, particularly central banks, undertake regularly with regard to a wide variety of potential market disruptions. Most private-sector financial firms, as well, have well developed contingency and business continuity plans in place for their operations. Nevertheless, it is clear that contingency planning for Y2K problems has a number of unique characteristics.
This process should lead to a more efficient allocation of finance within the global economy, but it will also call for the ability to adjust to structural changes in order for stable financial systems to be maintained. Today, I should like to outline the likely future development of the financial sector and of the financial markets in the euro area as envisaged by the European Central Bank (ECB). To this end, I shall first briefly discuss the impact of the introduction of the euro on domestic money markets. I shall then turn my attention to likely developments in the financial markets and in the banking system, before concluding with some remarks on how these likely developments might affect the stability and efficiency of the financial system in the euro area. Impact of the introduction of the euro on money markets Until the end of 1998 the various money markets of the euro area still displayed a certain number of distinctive features. However, following the changeover to the euro they were integrated swiftly and smoothly at the beginning of January 1999. A highly competitive single money market has already emerged in the euro area, as banks were well prepared for the changeover to the euro and the TARGET system has provided an efficient means of making cross-border payments. In particular, transaction volumes in money markets rapidly reached high levels while typical bid/ask spreads decreased almost immediately to very low levels. This indicates the depth and high degree of liquidity that the euro money market has already achieved.