There is no way for anyone to guarantee that any piece of the banking system will hold together. So testified Eugene Ludwig, the Comptroller of the Currency, to the House Banking Committee on November 4.
If this is true, then there is no way to guarantee that the system will hold together.
He stresses that he is committee to seeing that the nation's banks make the deadline. But there is nothing he can do about foreign banks. Are we so naive as to imagine that if Asian banks don't make the deadline and go under, the US banking system will not go through a major crisis? We have seen what happened when small Asian nations' banks got into trouble in the fall of 1997. What happens if Japan's banks don't make the y2k deadline?
Consider his warning, but applied to foreign banks: "The multiple linkages banks have with other counterparties -- other financial institutions, governments, borrowers, and depositors -- require that financial institutions allow sufficient time to assess the effects of their year 2000 solutions on data transfers and exchanges. It is not enough for insured depository institutions just to make their systems year 2000 compliant. Should their counterparties fail to address the year 2000 problem, or adopt a method which produces data that are unrecognizable by the financial institution, electronic fund transfers might fail or financial institution systems might be contaminated with corrupt data."
That's the heart of it. They have to fix everything to be sure of anything.
A word to the wise is sufficient.
* * * * * * * *
The year 2000 problem poses a difficult and wide-ranging challenge to the banking industry and the American economy. All users of communications, computer, or office automation technology face year 2000 risks and must prepare for the century date change. They must maintain the integrity of their internal systems and address external risks associated with connecting to other systems. The banking industryís readiness is especially important, because banks are at the center of our payments system and credit flows in the economy. Any operational and systems malfunctions caused by the century date change could have an impact on a bankís ability to meet its obligations. Of equal concern are malfunctions that bank customers may experience that could prevent them from meeting their obligations to the bank. These problems, if not addressed, could have repercussions throughout the nationís economy. Adding to the challenge is the difficulty in finding sufficient programmers who are familiar with old mainframe languages.
. . . . Banks that depend on vendors to achieve year 2000 compliance must carefully manage their relationships with such vendors and service providers, making sure that these vendors commit the necessary time and resources to make their products year 2000 compliant.
Given the complex web of technologies financial institutions use, as well as the many other institutions with which they exchange information electronically, no one can guarantee that no problems will occur when the clock strikes midnight on December 31, 1999. . . .
Information technology is an integral part of almost everything we do. Accordingly, the year 2000 problem has enormous reach, affecting almost every business, large and small. Communications systems, transportation services, and computers -- mainframes, networks and personal computers alike -- are all at risk. Modern conveniences and facilities, such as elevators, escalators, vaults, and alarm systems also may be affected. Computer programs for accounting, security, and bill payment need to be tested. All of these systems and processors will require some attention to ensure that they will continue to operate at the turn of the millennium. And the greater the reliance on technology, the greater the size and complexity of the task ahead for any institution, private or public. . . .
Today, nearly every aspect of the banking industry is dependent on computer systems for processing transactions and providing information. Banks exchange data daily with their customers, correspondents, vendors, other financial institutions, clearing houses, and corporate borrowers. Thus, financial institution applications must be not only revised or replaced to become year 2000 compliant, but, as noted above, they must also be tested for interoperability with the numerous internal and external systems -- foreign and domestic -- with which banks interact. Many experts tell us that the testing process will be the most difficult and time consuming challenge, because the fix adopted for one system may not be compatible with the fix adopted for another. . . .
If undetected or uncorrected year 2000 problems cause a bankís systems to fail, the bank could breach many legal obligations arising from its fiduciary and contractual relationships with customers. For example, the bank might no longer be able to comply with its contractual obligation to depositors to keep accurate records on account balances or to make timely payments in accordance with the instructions of demand account customers. The bankís systems might also improperly refuse debit, credit or ATM cards. Indeed, this has already happened. . . .
In-house fixes to internal computer systems will not solve an institutionís year 2000 problems. Most depository institutions rely on third party vendors for some data processing needs. Moreover, their systems interact daily with other computer systems, and each of these electronic relationships poses a potential risk to the depository institution. . . .
Clearly, the reliability of vendor-provided products and services will be critical to the success of many financial institutionsí efforts to address the year 2000 problem. Because a vendorís customers could include banks, thrifts, and credit unions, the regulatory agencies will conduct joint examinations of nonbank data-processing centers before June 30, 1998, using supervisory authority provided by the Bank Service Company Act. . . .
Data Exchange. The multiple linkages banks have with other counterparties -- other financial institutions, governments, borrowers, and depositors -- require that financial institutions allow sufficient time to assess the effects of their year 2000 solutions on data transfers and exchanges. It is not enough for insured depository institutions just to make their systems year 2000 compliant. Should their counterparties fail to address the year 2000 problem, or adopt a method which produces data that are unrecognizable by the financial institution, electronic fund transfers might fail or financial institution systems might be contaminated with corrupt data.
To manage these challenges, financial institutions will have to institute a comprehensive process which tests the linkage with each counterparty. The number of linkages that need to be tested can grow geometrically due to the interrelationships among payment systems at the local, national and international levels. Consequently, much of our focus as regulators in 1998 and beyond must be directed at ensuring that financial institutionsí year 2000 project management plans include comprehensive testing programs. The Federal Reserve Board will play a very significant role in coordinating the year 2000 testing process, because of their payments system responsibilities The FFIEC intends to provide further guidance outlining regulatory expectations for testing in early 1998.
Relationship with Counterparties. Insured depository institutions must ascertain how well their counterparties, who also rely on computer systems, are addressing the year 2000 problem. Counterparties that do not address these problems may experience operational or financial problems that may make it difficult for them to conduct business. If loan customers or bond issuers cannot repay their debt as agreed, the financial institution faces increased credit risks. If derivative counterparties cannot settle maturing transactions, the financial institution potentially faces not only increased transactional risk, but also increased credit risk, depending on the net position of the contract. If fund providers cannot deposit or maintain funding agreements, the financial institution faces potentially increased liquidity risk.