Research just published by International Monitoring suggests that the Y2K information technology (IT) issue - now under 90 days away - poses a massive threat to the world's banks.

Nick Gogerty, a spokesperson for the Y2K research firm, told Newsbytes that the risk potential runs into the order of trillions of dollars.

more at:
http://www.currents.net/newstoday/99/10/01/news1.html

Withdraw early and withdraw often.

-- A (A@AisA.com), October 04, 1999

Answers

Thanks A,

Excellent find! The research is very thorough, and the actual PDF document of the report has very good graphs and charts.

It reveals the biggest risk that no one else even wants to think about because if it kicks in it could collapse the entire international economy:

"The potential for a situation similar to Bankhaus Herstatt in 1974 poses the most significant risk to the international monetary system seen to date."

The Herstatt Risk is like the chain reaction idea, but a lot more complex when all the operational factors are considered. Here's a brief explanation from the report:

snip...

"Herstatt (Settlement) Risk, a type of operational risk

Foreign exchange transactions involve settlements in two different national payments systems. Herstatt Risk is named after the German bank whose closure, in 1974, occurred after it had received Deutsche marks due to it on FOREX trades, but before the corresponding dollar amounts were paid in the United States. One result was a temporary but severe disruption of payments across the CHIPS payment system; for the next few days banks withheld payments, resulting in a chain reaction of other payments not being made."

"A description of the events of 1974 from E.P. Davis book, Debt, Fragility and Systemic Risk, 1992, illustrates the scenario."

There was widespread concern in financial circles that such evidence of financial difficulty at a few firms might represent the tip of the iceberglenders respondedby tightening their credit standards. In the squeeze that followed, many lesser-rated borrowers found their access to security markets partially or completely curtailed, and they were forced to fall back on standby lines of credit at banks. Since banks experiencing these unexpected loan demands were also finding it necessary to pay sharply higher costs for funds, they increased their own loan ratesstock prices...fell dramatically during the spring and summer period of maximum financial strain.

...end snip

Unfortunately for the banks there are still many factors outside their individual controls even though they may be compliant. Any kind of events such as power failures or inability of a foreign bank to meet their payments could trigger this effect.

snip...

"Even low probability for events of such scope represent significant risk. The nature of these risks is event and or market driven and thus not prone to be seen until it happens. The Asian crisis in 1997 unfolded over a period of weeks. Our projections for the risk scenarios would involve events unfolding within days.

Moreover, because banks are closely intertwined financially with each other through lending to and borrowing from each other, holding deposit balances with each other, and the payments clearing system, a failure of any one bank is believed to be more likely to spill over to other banks and to do so more quickly. Default by one bank on an obligation to another bank may adversely affect that bank's ability to meet its obligations to other banks and so on down the chain of banks and beyond. These cascading failures if unstopped put the current global economic system at risk."

...end snip

-- @ (@@@.@), October 04, 1999.

Toast.

-- Andy (2000EOD@prodigy.net), October 04, 1999.

Very charred toast.

-- Randolph (dinosaur@williams-net.com), October 04, 1999.

IIRC Indonesia has already announced it will island it's banks....... Activated Charcoal that used to be bread.

Night Train

-- jes an ol footballer lookin fer the light (Nighttr@in.lane), October 04, 1999.

.......and now the end is near...... get cash, get it now....buy gold while it is still cheap .......and so we face the final curtain....... Damn, ole blue eyes still has it...

-- Southside Ed (Still@home.fornow), October 04, 1999.

Saw for the first time just yesterday an expensive new tv ad done by the CBA (Canadian Bankers' Assoc.) with what is supposed to be a reassuring interview format that tries to convince Canadians the banks are ready for y2k. It mentions "the interfaces are ready." Has anyone else seen it, want to analyze it? Are the bankers' associations in other countries running similar y2k ads? Are they running the ads because people are already withdrawing large sums of cash?

-- Rachel Gibson (rgibson@hotmail.com), October 04, 1999.

Saw the newspaper ads for the CBA and went to their site - very "comforting"...but who knows - maybe the very few Canadian banks that exist compared to American, will have done enough to middle through. Still need to fill up my big glass jar with more of the paper stuff though - with interest rates so low, who cares about the $1.12 I will lose by withdrawing???

-- Laurane (familyties@rttinc.com), October 04, 1999.

Also check out this ealier thread.
Herstatt Risk to Banks on Y2K
http://www.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=001VM0

-- spider (spider0@usa.net), October 04, 1999.

I don't how know how many of you have read the report in full. You should. Very interesting.

First, these aren't nay-sayers about the international banking system, as such, and they defend the current system strongly (including derivatives), which makes their concerns more pressing, IMO.

Second, they don't provide a compelling picture of why Herstatt risk is a Y2K risk (I can guess, of course), nor how it would actually unfold. That said, a 2 + 2 based on their report isn't hard (ie, banks' internal operations are mainly ok, but national payment systems and protocols are hosed).

Third, they conclude by suggesting that gold bugs may be right. See "One" just above for why this was a somewhat unexpected conclusion.

The key here, which demolishes Hoffmeister's long-time claims on this forum that cascading bank defaults are, for all practical purposes, impossible, is that the Herstatt phenomenon was historically factual (ie, it happened) and that this group is proposing this as a demonstrable template for a repeatable Y2K disaster.

To those who dismiss the report because the group does Y2K consulting, who knows? Read the report for yourself and judge. I found it literate, solid, sober and compelling as a description of a POSSIBLE, not certain, worldwide banking catastrophe.

If nothing else, it reminds us why even international preparations may go awry in one or more critical sectors for lack of paying sector- wide attention to 'x' exposures.

With < 90 days to go, the burden is on nations and national payment sytems to get their act together, not on me or on this forum. My burden is to keep preparing myself and my family for everything up to a "9".

-- BigDog (BigDog@duffer.com), October 04, 1999.