Small banks address year 2000 challenge

Abstract

Many computer programs used by banks record the date using only 2 digits. Unchanged, these programs, many of which calculate interest, loan terms, amortization schedules, and deposit maturities, will go haywire when the year 2000 arrives. At the extreme, computer systems may fail altogether. Federal regulators plan to assess every bank's conversion efforts and plans by mid-1998. Experts say companies have to be ready to test their systems by the end of September 1998 because 1999 will be the last year available for making major corrections.

Technically speaking, the new millennium doesn't begin until the year 2001, but banks need to be worried now about the year 2000. In fact, federal regulators want them to be very worried-and ready with an action plan-by Sept. 30 of this year.

Here's the problem, in brief. Many computer programs, particularly older ones and those designed for mainframe computers, use a six-digit space to record dates. Under this approach, Dec. 31,1999, would be represented by 991231. Thus, only two digits represent the year.

This approach has worked satisfactorily in this century. However, when the year 2000 arrives, the year will be represented in such programs as 00. The problem is, the systems will consider 00 to mean 1900-not 2000.

Unchanged, many programs that calculate interest, loan terms, amortization schedules, deposit maturities, and more will go haywire. In some computers, the problem is built into the hardware of the system itself. At the extreme, computer systems may fail altogether.

The agencies plan to assess every bank's conversion efforts and plans by mid-1998. Experts say companies have to be ready to test their systems by the end of September 1998 because 1999 will be the last year available for making major corrections. Regulators advise that contracts with vendors that don't cover the Year 2000 issue should be amended, in part so that it is clear who is responsible for each aspect of addressing the challenge.

"Banks seem to be ahead of the field in recognizing that Year 2000 poses a significant problem," testified Larry Martin, a consultant from Data Dimensions, Inc., Bellevue, Wash., at hearings held recently by the Senate Banking Committee's Subcommittee on Financial Services and Technology.

However, Martin added, "our estimates indicate that the banking and financial sector is no more than 10% complete" in implementing its solutions.

ABA Banking Journal took the opportunity of its community bank earnings survey (see p. 24) to conduct an informal poll of community-banker readiness. The best overall news was that there was no lack of awareness of the problem.

And preparedness is developing among the responding banks. More than half-60%-of the banks believe that they or their outside processing vendors or software suppliers have found solutions that will address the challenge or are well on their way. The remaining 40% have set up internal teams, engaged consultants, or started polling their vendors to make sure that development of solutions is under way.

Then there is the skeptical Kansas bank CEO who wrote in, "Who knows?" when asked if his bank was prepared. Another CEO, from Alaska, penned in, "`Solved? We have received assurances from most strategic vendors of compliance. Started on this in 1996. But we will only know it's 'solved' on 1-1-00."

Some of the bankers polled have taken the opportunity to buy whole new processing systems that were needed anyway because the new systems-so the vendors promise-have been designed with the Year 2000 problem in mind.

A personal concern for members of a bank board and for top managers is the attitude being taken towards the Year 2000 issue by the directors' and officers' liability insurance carriers.

In congressional testimony, Jeff Jinnett, president of LeBoeuf Computing Technologies, LLC, stated that some D&O carriers are looking at their clients' preparedness for the Year 2000.

"If the insurers determine that they have serious exposure with respect to a particular insured in a D&O portfolio, the insurer might also decide to change the terms of the policy at the time of renewal or even decline to renew the policy," according to Jinnett. Directors and officers worried about shareholder suits may want to find out what strategy their D&O carrier appears to be pursuing.

For more information about the Year 2000 issue, banks can contact a regulatory web site at http://www. ffiec.gov/y2k/ or dial up a toll-free faxon-demand service at 888-882-0982.