Banks -- Ready or not

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Dennis Taylor Business Journal Staff Writer

With one critical deadline just passed and another looming next month for banks to become Y2K compliant, the reviews are mixed on how ready they will be for the new year.

If you ask bankers, they'll tell you they're on target.

The California Bankers Association maintains that the banking industry is on pace to complete year 2000 compliance testing mandated by federal regulators.

Confidential examinations by the Federal Deposit Insurance Corp., a government regulator, earlier this year found that 88 percent of the roughly 325 state banks were "taking the appropriate measures" to be ready for the big dance.

"Every indication points to the industry being right on track to completing the work that needs to be done well in advance of the new year," the CBA stated in its report earlier this year.

The report was based on data from several regulators, including the FDIC and The Federal Reserve Bank, which are members of a consortium called the Federal Financial Institutions Examination Council.

The banking industry, because of regulatory scrutiny, is far ahead of other industries in ratcheting down its Y2K compliance, the CBA and analysts say.

"By in large they are in good shape--in large part because of the close scrutiny and the time table established by federal regulators," said Joe Morford, a banking analyst with San Francisco-based investment bank First Security Van Kasper.

Still, there's the 12 percent that "aren't taking the appropriate measures," which translates to 39 of the 325 banks in California that "must pick up their pace or correct a minor deficiency," the CBA wrote in its State of the Industry 1999 report.

This comes as no surprise to David Lackey, president of Palm Beach Gardens, Fla.-based research firm Weiss Ratings Inc. which conducted a survey of the nation's 6,034 banks.

Of the 909 banks that responded to the Weiss survey, 32 percent had missed a critical Y2K deadline. These banks reported that they did not complete remediation and testing of internal mission-critical systems by Dec. 31, 1998, as directed by the Federal Financial Institutions Examination Council.

Bank regulators have the power to close banks they deem unready, or could merge them into banks that are prepared.

Furthermore, 20 percent indicated they would be completing those tests in March or April.

Mission-critical computer systems are those that crunch the numbers for the banks' core businesses--loan calculations, checking and savings accounts, and cash management, to name a few.

The finding contradicts the earlier regulatory estimate, as well as a more recent federal finding that only 4 percent of banks have been rated "unsatisfactory" or "needs improvement."

"I don't understand how the authorities can give `satisfactory' Y2K compliance ratings to institutions that have apparently missed a critical compliance deadline," said Martin Weiss, chairman of Weiss Ratings.

"I personally believe the authorities are either using outdated information in their pronouncements or simply sugarcoating the truth."

A programming bug in a bank's mission-critical system could affect everything from the date a loan matures to interest-rate calculations.

The motivations for regulators to put a happier face on the Y2K challenge is to limit customer panic, Mr. Weiss said, but "in the long run, I feel this can only damage their credibility and create the condition for the very consumer panic everyone wants to avoid."

The Weiss survey received responses from 909 banks, roughly 15 percent of U.S. banks, a strong sampling.

As for the banks that didn't respond, "we must assume that, on average, institutions that did not respond to our survey are more likely to be late in fixing their Y2K problems than those that did," according to Mr. Weiss.

Only two Silicon Valley banks responded to the survey--Bank of Los Altos and Coast Commercial Bank in Santa Cruz. Both received "average" Y2K ratings, meaning they were generally on target for compliance.

According to Mr. Lackey, all banks were sent the survey, including the 10 commercial banks based in Silicon Valley.

Of course a failure to respond could also mean other things, such as bank officers didn't have time to respond, or they believed it was proprietary information.

Also, because banks have missed deadlines, it doesn't mean the vault doors will spring open at 12:01 a.m. on Jan. 1.

Mr. Lackey said there is still time for institutions to catch up because regulators have left a "cushion" at the end of the year.

"Even if a bank misses a benchmark deadline, an assumption is built into in for that--it's more of a wake-up call," he said.

The recent deadlines were:

* On March 31, federal regulators completed on-site examinations of service providers, software vendors and banks with in-house programming.

* Banks relying on service providers for mission-critical systems were required to substantially complete testing by March 31.

* By March 31 banks must have begun external testing with material other third parties, such as online customers, links with other financial institutions, business partners and payment system providers.

* On June 30, banks must have completed testing of all mission-critical systems and implemented all fixes.

Steve Smith, CFO and COO of Palo Alto-based Greater Bay Bancorp, said the bank has passed all the regulatory hurdles for its mission-critical systems and is now working closely with vendors to ensure a ripple effect from that end won't affect the bank.

"The one wild card for every bank, what we are hearing, is on the client side of the business," Mr. Smith said.

"If a widget maker sells to a widget seller who is a bank client, and the widget maker has a Y2K problem and can't provide widgets to the seller, then the widget seller can't make payments to the bank," Mr. Smith explained.

Moving into May, Greater Bay has no clients remaining that Mr. Smith would group as "high risk."

These tests and implementation of remedies hasn't come cheap.

The CBA looked at September 1998 quarterly earnings reports filed with the U.S. Securities and Exchange Commission and found that the 100 biggest banks, controlling $4.73 trillion in assets, are expected to spend $4.65 billion in Y2K costs. All banks are expected to have spent upward of $9 billion by year's end.

Bank income statements don't list a separate line item for Y2K-related expenses; instead the expenses can be spread out among several categories, including data processing expenses and "other."

At year's end, Mr. Smith isn't going to pitch a tent in his bank's computer rooms to make sure nothing goes wrong, but neither does he have plans to be far from the bank.

"Where I won't be is on a boat or a plane somewhere," he said.

Link

-- (trend@watcher.now), May 11, 1999

Answers

And people say that I don't post good news! From Yahoo Y2K news headlines... <:)=

Banks Ready For Y2K - (MADISON) -- A state commission says that nearly every bank in Wisconsin is ready for the arrival of the new millenium. The Governor's Y-Two-K Preparedness Committee says that more than 95-percent of the state's financial institutions are ready for the change to the year 2000. Banks have until the end of June to demonstrate that they are fully Y-Two-K compliant.

-- Sysman (y2kboard@yahoo.com), May 11, 1999.


Yup,

Was at my WI bank this morning and there was a big sign in the window.

We are Y2K ready

Should I ask them to put that in writing?? :)

GeeGee

-- GeeGee (GeeGee@madtown.com), May 11, 1999.


One key quote from the above article:

Steve Smith, CFO and COO of Palo Alto-based Greater Bay Bancorp, said the bank has passed all the regulatory hurdles for its mission- critical systems and is now working closely with vendors to ensure a ripple effect from that end won't affect the bank.

"The one wild card for every bank, what we are hearing, is on the client side of the business," Mr. Smith said.

"If a widget maker sells to a widget seller who is a bank client, and the widget maker has a Y2K problem and can't provide widgets to the seller, then the widget seller can't make payments to the bank," Mr. Smith explained.

Moving into May, Greater Bay has no clients remaining that Mr. Smith would group as "high risk."

-- Kevin (mixesmusic@worldnet.att.net), May 11, 1999.


Bit of clarification:

1: June 30 deadline is for complete testing of mission critical systems and implementation substantially complete. (www.ffiec.com/y2k)

2: One of the questions on the survey asked for the actual regulator ratings. Banks are simply not allowed to give this out. (believe me, 97% of banks would love to have this public, as for the other 3%, it could act as serious kick in the @$$ to get their stuff done) Many banks probably didn't respond because of this question.

June 30, 1999: What will happen?

Does anyone know of a online reference database which keeps track of banks' Y2K public statements or status?

back to lurking

-- newlurker (no@no.com), May 11, 1999.


Hope they're stockpiling toner/cartridges, developer, fuser assemblies, printer ribbons and the like. Just took inventory of all our printing supplies (at an HMO) and not a lick of 'em were made in USA. Chinese, Japanese, Taiwan.

A bank that can't print isn't a bank. Same for insurance.

- Got extra storage room?

-- Lisa (lisa@work.now), May 11, 1999.



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