Testimony Concerning the Progress of Financial Firms in Managing Year 2000
July 6, 1998 By Tanya Styblo Beder - Principal, Capital Market Risk Advisors, Inc.
home.swbell.net
Don't know if you've seen this. Entire testimony definitely worth reading. I found this (from GENERAL FINDINGS) very interesting:
"... disappointing news from vendors has moved banks to consider implementing financial transactions designed to reduce exposures - and particularly cash flows - from the December 1999 through March 2000 period. Examples are contingency plans that envision completing year-end portfolio trades by December 15th 1999; amending loans or entering derivatives with customers and counterparties to move cash flows out of the December to March period; and contingency planning for malfunctions in the wire transfer, settlement, credit card, ATM, and other critical systems."
=========================================================
CONCLUSIONS
The dire situation in many Asian countries and implementation of European Monetary Union will keep Y2K a low priority, as these markets experience some of the largest wealth transfers of all time. US financial firms are focused on reducing not only their exposures to Asia and Europe, but also to public sector and middle market entities within the US. The creation of contingency plans that remove cash flows from the critical Millennium period are prudent measures that are the basis of my fledgling optimism as to the risk of Y2K exposure of U.S. financial firms.
In closing, I offer eight areas that keep Y2K chiefs up at night, and merit focus by The Special Committee on the Year 2000 Technology Problem:
1. Telecommunications and Energy
Most large financial firms conduct 80% of their transactions electronically, and 25% or more of their transactions in the inter-bank market. To summarize the remarks by many Y2K chiefs in this area, "we don't have a clue:" this leads me to conclude that reliability on telecommunications is a Y2K wildcard. More than 80% of telecommunications managers in British firms polled in February said they feared a "large" risk from the millennium bug. The deregulation of industries such as communications and utilities has diverted significant attention from operating issues, making them slow to address millennium questions.
2. Exposure to the middle market
If a company cannot deliver its product because key suppliers cannot deliver, or because key customers cannot complete purchases, the financial consequences are significant. Companies in the Fortune 500 plan to spend an estimated $11 billion on Y2K fixes (including $3.5 billion by the largest financial firms) and are focused seriously on business continuity. The GartnerGroup Study of 6,000 companies in 47 countries indicated that 30% of all companies and governments have not started on Year 2000 compliance efforts, but that 88% of the laggards were companies with less fewer than 2,000 employees. Small companies are more likely to be able to operate manually and to be able to manage their full supply chain in a crisis.
But middle market companies are likely too complex to operate manually, and probably have not devoted sufficient resources to Y2K, and so are another wildcard. Some analysts predict that up to 20% of middle market companies will have problems with Y2K, leading to significant increases in bankruptcies of currently healthy firms. Of particular concern in the financial sector are regional U.S. banks that control about 20% of U.S. banking assets, and regional insurers who supply coverage for 30% of Americans.
3. Information sharing
Even though a great many Y2K problems have been solved, information sharing among parties who stand to benefit from others' knowledge is hampered by the fear of litigation. During my review, several Y2K chiefs commented "we are happy to discuss Y2K, however under legal advice there will be issues that we will not be able to discuss, at least not on the record."
Future litigation costs surrounding Y2K are estimated to range between $1 trillion and $4 trillion -- an amount over and above the $1.6 trillion estimate I mentioned earlier for technology fixes and direct business losses. Perhaps a wartime-type profiteering limitation should be considered for litigation costs, or maximum allowable damage levels, in order to promote the sharing of information.
4. Model risk
Moratoriums on systems projects outside of Y2K or EMU have caused some financial firms to postpone critical reviews and updates of their other financial models. This inadvertent neglect creates a potential time bombs for the future. Examples of recent "model losses" are those reported by Bank of Tokyo-Mitsubishi, NatWest, and Swiss Bank in their derivatives books. Future model losses are also likely to be driven by changes in credit spreads, correlations and volatilities driven by changes in relationships among currencies and interest rates and realities in the aftermath of the Asian crisis, EMU and Y2K.
5. Fraud
An additional concern for many Y2K chiefs is the potential for fraud. Some firms have corrected hundreds of millions of lines of code, using automated software sniffers versus manual intervention. Those who have relied on manual code correction are more susceptible to fraudulent transfers or other sabotage that may cause harm at future dates. Given the pressure of completing the Y2K fixes, few firms have the luxury of checking each manual change to their source code or other software.
6. Data issues in rolling the clock forward during Y2K testing
The question to pose is "How robust are the tests?" The practice of rolling the clock forward to test key dates - including the Millennium - requires far more than changing the date in a computer. The asset, liability and transactions data for the firm must be rolled forward as well, or the tests may not fully test a future transaction and thus give a false sense of security.
7. Impact of mergers and acquisitions
The continued global consolidation of financial firms poses ongoing challenges to established Y2K programs. In the United States alone, 72% of the banks have had their computing systems impacted by a recent merger or acquisition. The challenge to managers and regulators is significant - a good pre-merger report card may be invalidated by disparities in systems in the combined entity.
8. Liquidity
38% [increased to 50% Aug `98] of IT professionals say they may withdraw personal assets from banks and investment companies just prior to the Millenium, to protect their personal finances from year 2000 failures. If financial institutions implement contingency plans that prevent preclude use of electronic systems, and consumers thus have to withdraw extra cash to avoid the risk of credit card and ATM failures-for example, to cover their holiday spending in December 1999-how much additional liquidity will the banking system need?
========================================================
There are FAR more complex issues related to the Year 2000 problem than just computer software/hardware. It's a business problem.
Next year should be VERY interesting, especially in light of current global economic meltdown.
Cheryl
|
