WASHINGTON, D.C. - The Federal Reserve is spearheading a drive to impose strict new disaster-recovery regulations on financial institutions so that trading and banking operations can more quickly rebound from a Sept. 11-type catastrophic event.

Financial institutions, while also eager to avert a repeat in any future emergency, say they are concerned these regulations will prove too costly and difficult to implement.

"It's going to be expensive to do what the Fed is thinking about," says Paul Hugenberg, IT audit officer at Sky Financial Group, an $11 billion financial services firm.

The Fed acknowledges its ideas on regulating disaster recovery will add costs - how much remains unclear - and even fundamentally change how financial firms organize their central office and back-up operations.

The Fed has summarized its desire for new regulations in a document titled "The Draft Interagency White Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System." Comments on it are due today, and banks expect the proposals it contains to become regulations by year-end.

In the wake of the Sept. 11 attacks, Wall Street trading was halted for a week, and the Fed acknowledges that network and data back-up plans proved inadequate, creating a multibillion-dollar payments breakdown among the closely interconnected systems. Federal Reserve Vice Chairman Roger Ferguson is advocating new rules that would require banks, brokerages and other regulated financial firms to be able to resume business within hours in the event of a disaster. Other proposals include requiring financial firms to test back-up systems with their trading partners, and duplicate data center and business operations.

"The events of Sept. 11 graphically demonstrated the interdependence among financial-system participants, wherever located," Ferguson said during a recent meeting of the Institute of International Bankers in Washington, D.C.

Back-up systems not tested

The Fed discovered that many financial firms in the New York area had not tested their data and telecommunications back-up systems before Sept. 11. Few had planned for the magnitude of the destruction, with offices and telecommunications circuits obliterated. In addition, the commercial "hot site" providers with which the financial firms had contracted were turning customers away because of the demand.