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Summary and Comments

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Category: 

Banking

Date: 

1997-07-11 00:00:00

Subject: 

At Least 90% of Banks/Securities Firms Are Noncompliant

  Link:

http://www.senate.gov/~banking/97_07hrg/071097/witness/martin.htm

Comment: 

The Subcommittee on Financial Services and Technology of the Senate Banking Committee heard testimony on July 10 that, at most, only 10% of U.S. banks and U.S. financial firms have completed their y2k repairs. This estimate was made by Larry Martin, of Data Dimensions, a company that sells y2k repair software. His estimate appears on page 2 of his published testimony.

But the problem extends way beyond Ametican banks. It's not enough to solve their problems. The international banks are even more at risk.

"One of the major concerns for the financial community is the risk to the global infrastructure, particularly to the servicing organizations such as Swift, credit reporting and the ATM networks. The lack of concern and action on the part of the international banking community is particularly distressing. The ability of international banks to operate effectively after the Year 2000 is, in our estimate, seriously in question" (p. 2).

He went on to discuss the myth -- widely believed by optimists who discuss the y2k problem -- that consolidation is the answer. This myth is popular because there are people who are incredibly naive about the y2k problem but who regard themselves as very, very sophisticated investors. They think they will short the companies that aren't going to be compliant and then buy shares in the companies that will buy them up for pennies on the dollar. This strategy will not work. The y2k problems will migrate to the firms that absorb them.

"And there are other factors that intensify the basic problem. The current tendency in the banking industry towards consolidation, particularly in terms of mergers and acquisitions, poses and added risk. A bank that has worked hard to become Year 2000 compliant might acquire another bank that hasn't. Then the whole process is back to square one. And what about the creditworthiness of companies to which banks have lent money? If those companies are not Year 2000 compliant, the risk to the banks is greatly magnified. It is very difficult to pinpoint all the possible consequences of noncompliance" (p. 2)

Difficult? It's impossible.

This means that the operations of dead companies will stay dead. Those losses will be sustained by everyone who has relied on them. When we are discussing banking, this means every investor, every company that enjoyed a line of credit and relies on it, and everyone who sells goods and services to these people.

In short, just about all of us.

Link: 

http://www.senate.gov/~banking/97_07hrg/071097/witness/martin.htm

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