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Summary and Comments

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Category: 

Banking

Date: 

1997-08-06 10:21:01

Subject: 

Three Major External Risks to Every Bank

  Link:

http://www.senate.gov/~banking/97_07hrg/073097/witness/ludwig.htm

Comment: 

Comptroller of the Currency Eugfene Ludwig identified three outside risks that threaten every bank. Multiply this by 13,000 U.S. banks and (???) foreign banks.

* * * * * * * * *

Fixing internal computer systems alone will not take care of year 2000 exposure. Bank systems interact every day with other computers, and each of these electronic relationships poses a potential risk to the bank. The three primary external risk areas are:

Reliance on Vendors -- The heavy use by banks of vendors for performing critical operational processes, such as deposit posting or check sorting, requires that banks closely monitor their vendors' conversion programs and determine if contract terms can be revised to include year 2000 covenants. Banks must have alternative service and software providers identified in the event that vendors cannot correct their systems or software adequately or quickly.

Data Exchange -- The multiple linkages banks have with other parties -- other financial institutions, governments, borrowers, and depositors -- require that banks allow sufficient time to assess the effects of their year 2000 solutions on data transfers and exchanges. These linkages are especially apparent in the interrelationship among payment systems at the local, national, and international levels. Banks must be able to exchange payment information to clear checks, process electronic transfers, and maintain data for customers. Larger banks may have additional responsibility to process payrolls or pension payments for smaller institutions and customers.

The international dimensions of the year 2000 problem are a serious concern to bank regulators because of these interconnections. Domestically and across borders, banks, payment systems, and government agencies must be able to handle year 2000 processing and communicate with each other to facilitate normal banking and commerce. The OCC, together with the Federal Reserve and the FDIC, is working closely with the Basle Bank Supervisors Committee to reach international agreements on year 2000 solutions. We pressed hard to advance this issue and to obtain a committee report for supervisors, which is to be released in September. These efforts and others help raise awareness around the world of the need to address the year 2000 problem.

Corporate Customers -- Banks need to consider in their assessments of credit risk whether a prospective borrower might experience cash flow or other problems due to his or her own year 2000 problems. Consequently, as part of our year 2000 program, we are telling banks to evaluate the compliance efforts of their own customers and to factor this information into their loan underwriting (pp. 4-5).

Link: 

http://www.senate.gov/~banking/97_07hrg/073097/witness/ludwig.htm

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