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Y2K – Can You Bank on It?
(This paper is distributed courtesy of NOVA Y2K. It may be copied and distributed freely as long as it is printed in its entirety and no fee is charged)
The first thought many people have upon learning about Y2K is: "I'd better get my money out of the bank before the ball drops on this century."
We know Y2K has the potential to affect virtually every facet of our lives, requiring us to plan and prepare for a variety of disruptions. The safety of our money is rightly one of the more serious
concerns to address.
The Northern Virginia Year 2000 Community Action Group (www.novay2k.org) will be publishing a series of papers that will help families make well informed decisions on a number of preparedness topics. Our first paper is on banking and Y2K, in recognition of the importance people place on their financial security.
The good news is that many independent analysts have ranked the banking industry as one of the most aggressive in confronting the Year 2000 problem. For example, the Gartner Group rates the domestic
financial services industry as "low risk".
And analyst Peter De Jager writes, "The financial sector does lead all other sectors in preparations for Y2K." Furthermore, banking is the most intensely regulated industry in the US and bank examiners have been busy issuing guidelines, assessing the adequacy of each institution's project, and setting deadlines for remediation and testing.
But it is crucial to remember that when it comes to Y2K there are no guarantees – even the best managed projects may be in for some nasty surprises.
Furthermore, banks are as dependent as everyone else on critical suppliers (especially telecommunications and electric utilities). Their vulnerability becomes ours. After all, we depend on banks for a number of financial products and services, including:
- continued access to ready cash
- direct deposit of paychecks
- authorization of credit cards
- accurate income calculations and record keeping
- savings and transaction activity
Likewise, businesses also depend on banks for, among other services:
- cash
- lines of credit
- lock box and cash management services
- corporate accounting and record keeping
- tax processing
- employee benefit plan management and record keeping
Develop a Structured Plan
So in order to protect ourselves from possible Y2K disruptions in the banking industry, it is useful to develop a structured plan.
The first step will be to identify the products and services that you need from a bank. Step 2 involves understanding the risks Y2K imposes on your access to those products and services. In step 3, you should determine a strategy for protecting your finances. The final step is to evaluate and monitor the readiness of your banking institutions.
Step 1: Profile Your Needs
How concerned should you be about protecting your financial assets from Y2K?
It depends on how much money that you have and how it is invested.
Ask yourself the following questions to help pinpoint your vulnerabilities:
1. Am I worried about the readiness of my financial institution for the Year 2000 Problem?
2. If I do have concerns, where do they lie? In the availability of cash through ATMs and tellers, in the routine electronic transfer of funds, or in the long-term safety and record keeping
regarding my accounts?
3. Bank deposits are insured by the FDIC up to $100,000 per institution. Are all my deposits insured?
4. What is my need for cash? How much currency would I need if I could not access my accounts for a day, three days, a week, or more?
5. What is my exposure to holding cash? Do I have a place to keep large amounts of currency safe from theft and fire? How much am I willing to forgo in lost interest earnings?
6. Do I own a business that requires bank services in order to remain in operation?
Are these services, such as lines of credit, likely to be difficult to establish quickly at an alternative institution if my bank were to fail?
Step 2: Understanding the Risks
Y2K can interfere with your short term access to banking services. For example, disruptions in the flow of electricity or breakdowns in the telecommunications network could render ATM
machines and credit card payment systems useless.
Furthermore, should your bank experience difficulty in running its internal operations because of Y2K, you may find that your ability to access bank services directly is also disrupted.
In the worst case scenario, the bank could fail if its problems become insurmountable. In that instance, funds deposited in insured accounts amounting to $100,000 or less will be repaid by
the Federal Deposit Insurance Corporation (FDIC). Past bank failures have always been resolved by the FDIC in a manner that provided insured depositors virtually immediate access to their
funds. However, it is possible to envision Y2K related bank failures that would impose unique and heavy administrative burdens on the FDIC.
Here again, the risk involves short term inaccessibility of funds rather than long term loss. Therefore, as long as your money is in insured deposit accounts, you will not face the risk of long-term loss. (Caution:
During the past decade, an increasing quantity of non-deposit investment products have been sold in bank lobbies, such as mutual funds, money market funds, and fixed rate and variable rate
annuities. These types of accounts are not insured by the FDIC.
If you are unsure if your funds qualify for FDIC insurance, bring your account records to your bank branch office and ask the manager whether or not those accounts are insured.)
A business owner has more to fear from the possible failure of his bank and the consequent forced transfer of his or her banking business to another institution. While the FDIC will protect a
business's insured deposits up to $100,000 in aggregate, no similar protection is accorded to borrowers.
So although the borrower's business prospects may remain completely unchanged by Y2K, the new owner of any loan may decide not to extend any new credits, or may even decide to reduce or close existing credit lines. In these circumstances, it can be difficult for a business to quickly develop a new banking relationship. The situation could be worse in a Y2K environment – especially if most bank loan officers are busy assessing the operations of existing customers. Therefore, it is wise to develop a plan which reduces exposure to any single institution. A business should also begin to assess the Y2K readiness of those banks upon which it depends.
Step 3: Developing an Action Plan
This is both a risk minimization plan and a contingency plan. The goal of the plan will be to reduce exposure to any Y2K disruption.
At the same time, the plan should include fallback strategies that can be used in case disruptions do occur.
1. Organize a list of all of your accounts.
Include those that you oversee for family members such as seniors and children. Group those accounts that belong to the same bank. Gather together statements, cancelled checks, and anything else that will help you understand how the account is currently used.
2. Rate each bank you use
based on the amount of money you have on deposit and the types of transaction you conduct with it. The rating should incorporate your dependence on the bank for short-term liquidity, long-term safety, and your overall trust in the managing institution (based on past experience).
3. From these measurements, prioritize your inventory based on where you have the most risk. Start with where you have the highest risks, then move on to the less important accounts.
4. Evaluate how you would be affected
by short term or long term disruptions at each institution. If the potential consequences appear intolerable, plan some risk mitigation strategies.
- For example, if all of your checking accounts are at the same institution, consider opening an extra account at another bank.
The chances of both banks experiencing problems simultaneously is much less than one bank experiencing trouble.
- Stockpile some of the goods that you regularly consume. This would include some food, medicines, toiletries, and dry goods products. Having these items on hand will reduce your need
for immediate access to your money.
- Even without a Year 2000 problem, computers have been known to make mistakes. That is why it is always a good idea to scrutinize and hold on to bank statements. Maintaining
good records may be even more important for dispute resolution in a Y2K environment.
- Finally, decide how much, if any, extra cash
you will be holding during the date change transition. Once you have decided how much you will be withdrawing, you should discuss your plans with the branch manager at each bank from which the withdrawals will be made. The Manager may be able to arrange for you to receive your cash in a private room, away from any prying eyes in the bank lobby. You will also be helping your banker determine how much cash to order to accommodate increases in consumer demand.
Step 4: Assessing Your Banks
The last step of your structured plan is to assess the readiness of each of your banks.
Naturally, you should begin with the institution that you rated as being the most critical in Step 3, and then assess the other(s) in order.
1. A good starting point for any investigation these days is the Internet. If your bank has a presence on the World Wide Web, visit the site and read any information that it
provides about Y2K. Does the bank appear to be taking Year 2000 issues seriously?
Does the Web site include information about workshops or seminars for local businesses to learn about Y2K? Can you find links to informative Y2K Web sites? How much space is devoted to Y2K relative to other subject matters? Does the bank provide progress reports on its Y2K remediation project on the Web site?
2. Has the bank provided its customers with information about Y2K
in statement stuffers, customer newsletters or other materials? How seriously does the bank seem to be addressing the issue relative to other topics it deals with in this type of literature?
3. If you are a commercial customer of the bank, how much information did the bank provide you about Y2K?
To what extent did the bank want you to provide information about your own Y2K readiness? If you are not a commercial customer of that bank, perhaps you have friends who are. Ask them how much importance the bank has placed on the Y2K readiness of its commercial customers.
4. Search for any other publicly available information on the financial institution's Year 2000 plans. You may find such information included on, or with, your statement, or
available at bank offices or branches. If the bank is publicly traded, you can obtain their quarterly (10-Q) and annual (10-K) SEC filings which must now describe the activities and costs of the Year
2000 program at the bank.
5. If the information that is publicly available does not satisfy your concerns, you should approach the institution directly.
Find out if the bank has arranged a customer communications seminar on the Year 2000.
Typically, the bank will have the right personnel present to answer most questions regarding general and bank-specific Y2K issues. If no such programs have been planned, try to meet with the most senior bank officer whom you are able to see. Every bank is executing a Year 2000 program, so there will be someone on the staff who does know all of the answers to your questions. Make sure the bank understands that you need more information in order to become comfortable that they have properly prepared for the Year 2000.
Here are some questions to ask your bank:
1. Is there any literature that documents the Year 2000 program activities of the institution?
2. Does the institution maintain the source code on mission-critical systems, and have these systems been fully repaired and validated?
3. How does the institution know that vendor-supplied systems are (or will be) Year 2000 compliant?
4. Did the institution test all mission-critical systems themselves? Even if they were also tested by the vendor?
5. When does the institution feel that it will be fully ready for the century date change?
6. Has the institution made any policy changes to their underwriting and servicing of loans and investments?
7. What plans has the institution made for Y2K-related disruptions to the infrastructure or their services? Specifically, what are the banks contingencies for computer failure, power
failure, or telecommunications failure?
8. Will the bank have sufficient cash to handle increased demand for withdrawals?
9. Know the institutions' schedule for preparations and hold them accountable to it. For instance, all banks are working towards the following deadlines imposed by federal regulatory
agencies:
- December 31, 1998 – Testing of internal mission-critical systems should be substantially complete. Service providers (i.e. a vendor that supplies computing applications from an off-site data
center) should be ready to test with the institutions.
- March 31, 1999 – Testing by institutions relying on service providers should be substantially complete.
- June 30, 1999 – Testing of all mission-critical systems should be complete and implementation should be substantially complete.
Ask how far along this path the bank has come.
The bottom line is that every bank should be finished preparing for the Year 2000 by June of 1999 – at which time we will have many answers to the most pressing of our questions.
Do not listen to bad advice
One final note about assessing the readiness of your institution: We have seen one piece of bad advice appear in a number of
discussion groups and similar places, namely that big banks are safer than small banks.
The reasons cited – neither of which is valid – are 1) Federal regulators will protect the largest banks because they are "Too Big to Fail" , and 2) Large banks have more money to spend on the problem
1. Too Big to Fail. This term first entered the banking lexicon when Continental Bank failed in the early 1980's.
While the bank did fail, regulators were worried about the consequences of imposing losses on so many uninsured depositors, many of whom had substantial uninsured balances. However, a bank failure resulting from a Year 2000 problem would most likely involve a system breakdown that prevents the bank from processing transactions. In such a situation, bank supervisors would be forced to deal with a large bank the same way it deals with a small bank with similar problems.
2. Greater resources. While it is true that large banks have budgeted much more money than small banks for dealing with Y2K repairs, they also have proportionately larger, more
complex systems. It is not clear, in advance, that institution size will be useful in predicting the likelihood of Y2K success. However, if part of your strategic plan involves opening
accounts at additional institutions, you might want to try using different types of institutions.
It is possible that, in the future, we will be able to look back and notice that one type of bank did much better than the other types.
Additional Information:
The following Web sites contain information about banks and Y2K:
Trade Groups:
The Bank Administration Institute: www.bai.org/y2k
The Independent Bankers Association of America: www.bai.org/y2k
America's Community Bankers: www.acbankers.org/infoexchange/y2k.html
Government:
The Federal Financial Institutions Examination Council: www.ffiec.gov/y2k
Other:
Market Partners: www.marketpartners.com
Northern Virginia Year 2000 Community Action Group: www.novay2k.org
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