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Summary and Comments

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Category: 

Banking

Date: 

1997-05-05 00:00:00

Subject: 

New York FED Warns Banks: Repaired and Tested by Dec. 1998

  Link:

http://www.ny.frb.org/docs/bankinfo/circular/10937.html

Comment: 

The fact that the New York Federal Reserve Bank -- the key regional bank in the Federal Reserve System -- has identified the y2k problem as significant is itself very signigicant. The posted document is low key, but its message is frightening: the commercial banks under the NY FED's supervision are not compliant. They must get compliant and also be tested by December 31, 1998. So says the NY FED. But the FED cannot legally compel this. Besides, the FED itself is not compliant.

There is also the problem of the non-compliance of suppliers. In bold face, the report says, "Business lines should be considering whether their clients and customers are adequately addressing their own risks from the Year 2000 as some are likely to face problems that will affect normal business operations and banking relationships."

What does this mean? It means that any bank that has loaned money to a firm whose suppliers cannot get compliant or whose customers cannot get compliant is at risk. This is an admission that a catastrophic economic breakdown is virtually guaranteed. There is no way that any bank can find this out in time to call in the risky loans. Also, banks that do call in such loans are risking triggering a banking panic and a recession.

It is too late for banks to cover themselves. To admit in public that the problem exists is to risk creating a panic. No money center bank will do this. It would have to call in all of its loans. Every company that relies on a mainframe computer or non-compliant PC's, or is dependent on such a company, is at risk. This means every company in the West.

No large business is secure from the problem of a breakdown of its suppliers and its customers. We know that most businesses are not compliant and will not get compliant in time. So, this warning by the FED is virtually a prediction of an economic crisis.

As for New York City: "We believe that Year 2000 systemic risk issues are particularly significant in this District and that increased attention is necessary to help avoid future problems." Whenever you read the phrase, "systemic risk," start worrying. When it applies to New York City banks, start worrying a lot.

Link: 

http://www.ny.frb.org/docs/bankinfo/circular/10937.html

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