Banks Race to Prepare Systems For Arrival of
the Euro Next Year Series: 2
American Banker
Thu, Mar 06 1998
The euro is coming, and it is not something that matters only
to Europeans.
The single-currency system for the European Union is less
than 10 months away. Likely to be the single-biggest political
and financial event on that continent in 25 years, it will have
ripple effects worldwide and require a wave of technological
readjustment in the corporate world, not the least among
banks.
The average multinational bank-including the largest in the
United States-will probably have to spend $50 million to $150
million on information technology related to the euro,
according to Gartner Group Europe. Financial institutions
must pay attention not just to back-office accounting but to
payment systems, automated teller machines, and point of
sale terminals, as well as introducing new products, training
staff, and educating customers.
"This will have a big impact, even greater than year 2000,"
said Robert J. Baldoni, a New York-based partner of Ernst &
Young. "Banks are on a tight timetable."
In this story and the next two installments, American Banker
examines the technological challenges posed by the new
currency and how U.S. and international banks are
responding. The overarching conclusion: The euro is set to
transform virtually all aspects of banks' systems and
strategies.
European bankers seem to have started on euro projects early,
and many consultants say they have a better understanding
of the issues and are in many ways further along than their
U.S. counterparts.
"Our consulting for the euro began in 1996 and accelerated in
1997," said Bill Irving, a partner in New York at Coopers &
Lybrand's financial services division. "We continue to
consult, although more recently our clients are likely to be
from the U.S. than Europe.
"In general, the Europeans have focused on the euro at the
expense of year 2000, and in the U.S. they have done the
reverse."
George Thomas, senior vice president at the New York
Clearing House Association, gives U.S. banks more credit.
"From what I have heard, all the major U.S. banks are well up
to speed. Their European operations are gearing up for the
euro."
Of course, it is not just banks that are affected. Gartner Group
has said large corporations are likely to require 36 months to
48 months to fully convert their systems to the euro. It
estimated the total cost of converting all of Europe's corporate
information technology systems will total $150 billion to $400
billion over six years.
Multinational companies such as Daimler-Benz, International
Business Machines Corp., Philips, Siemens, BMW, and Fiat
have said they will make the changeover in a "big bang"-all at
once at the beginning of next year.
Eighty percent of IBM's vast information technology network
will be affected by the euro, said Peter Cruttenden, euro
internal programs leader for IBM Europe.
"Everyone should be past the paralysis stage and on to the
engagement and decision-making phase," he said."This is not
a panic-stricken message but one of urgency, seriousness,
and focus. This train is rolling, rolling fast" and given the
preparations of the last 18 months, "there is an extreme
impossibility of its being derailed."
The race to prepare for the euro is complicated by systems
changes under way to cope with the advent of the year 2000,
when computer programs may be unable to deal with the
calendar change after Dec. 31, 1999.
Experts say the big difference between the two events is that
the year 2000 problem is embedded in software and clearly
requires a technical fix. For euro-compliance, as they put it,
technology and business considerations go hand-in-hand.
For the euro, "anyone with a presence overseas will be
heavily impacted," said Coopers & Lybrand partner Willem
van Rijn. That includes "anyone who funds themselves on
foreign markets or has active payments or commercial traffic
with the EMU (European Monetary Union) countries."
He said many banks are not ready to handle the euro, nor
have they thought through the need to establish dual
accounts for receiving payments in the new currency.
"Smaller U.S. regional banks have a wide correspondent
banking network and think they can rely on a package for dual
currency," Mr. van Rijn said. "But they can't understand the
business arrangements and fail to understand that their
competitors are knocking on their customers' doors."
The big providers of global custody and corporate cash
management services-led by Chase Manhattan Corp.,
Citicorp, and BankAmerica Corp.-are forging ahead with
testing, seeing the euro as a significant business opportunity
in cross-border payments.
They now know based on economic and exchange-rate criteria
dictated by the 1992 Maastricht Treaty that 11 countries are
likely to "make the cut" for the euro system. They can be
named by the mnemonic BAFFLING-Belgium, Austria, France,
Finland, Luxembourg, Ireland, Netherlands, Germany-plus the
"Club Med" countries Italy, Spain, and Portugal.
The United Kingdom, Denmark, and Sweden have decided not
to join for political reasons and have adopted an opt-out,
opt-in clause. Greece will not qualify. After May 2, when the
Council of Ministers for Economic and Financial Affairs is
expected to officially certify the 11 countries, it will be full
steam ahead.
On Jan. 1, the 11 currencies would merge into the new euro
and become the medium for book-entry transactions of capital
markets, government agencies, and wholesale corporate
payments.
Government and corporate bonds, listed futures, and options
will all be redenominated, and stocks will be quoted, priced,
and settled in euro.
During the three-year changeover phase, use of the euro will
be encouraged alongside national currencies.
The European Currency Unit, or ECU, a benchmark in place
since 1979 that was to play a part in the transition to the
European Monetary Union, will also be replaced by the euro.
The European Banking Federation estimated in 1996 that the
changeover to the euro will cost the industry somewhere
between $8.7 billion and $10.9 billion, and now it is expected
that the total could increase by as much as 50%.
"Banks are typically spending three to five times as much as
they are on year 2000," said Nick Jones, research director of
Gartner Group Europe.
But there is no difference in priority or necessity.
"I know of some large European banks that are more behind
than they should be" on the year 2000, Mr. Jones said. "That
is because they've been concentrating on the euro."
They have been doing that because the business
opportunities of "playing at the pan-European level" are seen
as so compelling.
As with the year-2000 conundrum, bankers must pay attention
to basics such as creating organizational awareness, doing
business impact analyses, translating these into strategic and
technology projects, and encouraging action. It is all
complicated by a shortage of technology employees. Mr.
Jones sees a 50,000-person shortfall in the United Kingdom
alone.
"A euro project is more difficult than anything undertaken
before," he said. "Even now there is a degree of uncertainty
that makes planning difficult. Often banks fall behind on
scenario-based planning and some of these scenarios need to
be updated.
"Year 2000 is easier for a bank because it can put its finger on
the things to change. It is much harder to plan when you can't
be certain what is ahead."
Most U.S. financial organizations are conducting their euro
projects in Europe, where they have people who understand
the technicalities, regulations, and political environments that
vary by country.
They will be dealing with a new regulatory body, the
European Central Bank in Frankfurt. It will take over from the
European Monetary Institute, which was formed in 1994 and
will be liquidated. The central bank directors will be
designated in June. The president is likely to be the current
Dutch head of the EMI, Wim Duisenberg.
From next year, the European Central Bank will be operating in
the euro and new issues of public debt will be so
denominated.
"One of my concerns is that the European Central Bank will
not automatically inherit the credibility of the Bundesbank,"
said Alan Blinder of Princeton University, the former vice
chairman of the Federal Reserve Board. "That will be a primary
concern of the ECB and likely to lead to tighter monetary
policy."
With the European Central Bank "accountable to no national
government, it is going to be the most independent central
bank in the world," Mr. Blinder said.
On Jan. 1, 2002, euro bank notes and coins will be introduced
to the public and all the technical processes should be
completed. Six months later, individual European currencies
will retire, leaving the euro as the only valid currency. The
European Union is likely to be the largest economic and
currency bloc in the world.
The monetary union has led to a new pan-European payment
system linking domestic networks. The Trans-European
Automated Real-Time Gross-Settlement Express Transfer
System, or Target, has been set up to bring the benefits of risk
reduction and settlement efficiency to cross-border
transactions in euro.
There are more than 25 systems in the European Union
countries that handle large-value payments, comparable with
those in the United States' Chips and Fed Wire networks.
They are expected to consolidate, leaving a few dominant
national payment systems such as Chaps Euro, the U.K.
banks' entry point into Target.
Another, the ECU Banking Association, is a 50-bank system
being upgraded to switch to euro payment settlements
beginning in January 1999. The EBA views its proposed
same-day value system as complementary to Target.
The introduction of the euro will affect U.S. correspondent
banks in Europe and will have an impact on U.S. corporations
purchasing from and supplying products to Europe. From
1999 to 2002, multinational companies' enterprise systems will
have to be "bilingual" for both the euro and local currencies.
Gartner Group has been talking about the euro with European
banks for two years and some have been running euro
projects that long, said Mr. Jones.
"Apart from a few exceptions, European banks have been
worried about it longer than U.S. banks," he added. Although
he said American interest has doubled in the past six months,
one or two U.S. banks have been especially farsighted, seeing
in euro "an opportunity to offer a pan-European structure."
Copyright c 1998 American Banker, Inc. All Rights Reserved.
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