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1998-01-19 09:14:26


BUSINESS WEEK says: Too Late for Small Banks



Small banks probably won't make to to the millennium. So says BUSINESS WEEK ON-LINE in a provacatively titled article, "WILL YOUR BANK LIVE TO SEE THE MILLENNIUM?" How many banks won't make it? Maybe 5%. Maybe 20%.

My estimate: 100% won't make it. For the banking system to work, most of them on earth must make it. If there is any thought that most of them won't make it, all of them will experience bank runs. Bank runs that shut them down before most of them can make it.

This assumes that it is technically possible for any of them to make it, for which there is no evidence. The most y2k savvy of all U.S. banks, Bank of Boston, still has over half of its systems noncompliant.

The article's slant is this: lots of small banks and mid-sized banks won't make it. This is the media's slant on y2k in general. The big boys will make it. Trust the big boys. Don't trust the little players. This slant is good for advertising revenue. If the media identified the big outfits as being far more vulnerable, they would lose revenue.

The bigger they are, the more complex their computer systems, and the older their systems are. They are burdened with a mountain of legacy code and embedded chips. The little guys came late to the mainframe party. It is the large organizations that are beyond the point of no return. This is why no Fortune 500 company is compliant.

What these happy-face articles ignore is the obvious: the Japanese banks. These are the capital monsters that hold U.S. securities and fund U.S. consumers' purchases. These banks have barely begun the fix. The largest U.S. banks are pipsqueaks compared to the Japanese banks. The fact is, the biggest banks on earth are going to miss the deadline.

The U.S. media speak as if the U.S. were the whole world. In matters of mainframe computer code, the U.S. is about 20% of the world. If the rest of the world misses the deadline -- guaranteeed -- this will pull us into the quicksand.

All of these happy-face, "big guys will make it" stories also assume that the power grid will stay up -- a matter of great faith.

I don't know how long this article will be on-line. But it was for a while. That's significant. To call as much as 20% of U.S. banks into question is a move into reality. Not far into reality, but at least the right direction.

* * * * * * * *

The Year 2000 problem -- computer systems that will read 1900 instead of 2000 on, Jan. 1, 2000 -- is bedeviling thousands of businesses. But financial institutions, especially banks, have the most to worry about. They all deal with funds with dates attached. Banks are linked in an intricate financial web so that each bank depends on the accuracy of other banks' computer systems, including the Federal Reserve Bank. If computers can't read the date 2000, the best-case scenario is that computers just won't work. Worst-case, they miscalculate all types of numbers, from mortgage payments to stock prices.

Most major banks are well on their way to fixing their systems. But more than a fair number are lagging behind, especially midsize and small banks. Says George R. Juncker, vice-president of the Federal Reserve Bank of New York: ''I think definitely...some just won't be open for business on Jan. 3, 2000.'' . . .

[Economist Ed] Yardeni predicts that from 5% to 20% of banks will fail as a direct result of Year 2000.

Fixing the problem is a costly, labor-intensive task. At San Francisco-based Bank of America, the fifth-largest U.S. bank, a thousand people are working full-time examining 200 million lines of code. Currently, only 35% of the code is fixed. Estimated price tag for the job: $250 million.

While Bank of America's problems are complex, it has an edge over smaller banks in that it has the resources to throw at the project, even if costs rise. . . .

Midsize banks, which range in assets from $5 billion to $35 billion, are particularly vulnerable. ''There could be a number of midsize banks [that are] going to have trouble,'' says Merrill Lynch & Co. analyst Sandra J. Flannigan. ''I don't think they are as far along with this as the big guys.'' For starters, these banks have higher expense-to-revenues ratios than the top 20 banks. While software costs can be similar for both large and midsize banks, big banks can spread the costs over more customers.

Plus, midsize banks don't have the same clout as large banks when it comes to recruiting programmers. . . .

''There's no question small banks are further down the food chain,'' says Hal Schroeder, an analyst at Keefe, Bruyette & Woods Inc. in New York. . . .

Then there's the customer perspective: ''There may be movement to the high ground as we move closer to 2000. Meaning...if you are heavily reliant upon a [smaller] bank, you might want to have a relationship with a major player,'' says Steve Sheinheit, a senior vice-president and head of corporate systems and architecture at Chase Manhattan Bank, the nation's largest.


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