Year 2000 Focus

By Cook, Timothy | Independent Banker, April 1998 | Go to article overview
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Year 2000 Focus

Cook, Timothy, Independent Banker

The millennium glitch affects your business customers' creditworthiness

By now you know that the Year 2000 problem, if not properly addressed, could seriously disrupt your bank's operations. Regulators require you to focus on the Year 2000 problem, a globally pervasive glitch affecting date-sensitive computer programs. Regulators also expect that you have assessed your bank's situation and have developed action plans, leaving at least 12 months to test any programming fixes that might be necessary. And you have to make sure your thirdparty vendors will remain reliable, viable business partners beyond Dec. 31, 1999.

But the Year 2000 problem doesn't end there for banks. It involves more than your bank's automated operations; it also involves the operations of your bank's commercial borrowers. You should be periodically checking the efforts of Year 2000 compliance by your commercial borrowers. Business disruptions could be significant for your corporate borrowers if they fail to address this issue properly. The Year 2000 problem may interfere with business tasks as fundamental as servicing clients, tracking billing records or acquiring products to sell. If corporate borrowers are not prepared for Year 2000, it could damage their creditworthiness.

As a result, regulators warn that additional credit risk is created by business customers who fail to resolve their Year 2000 problems. And some estimates predict that Year 2000 credit risk may be substantial. At least one study predicts that half of all businesses will suffer Year 2000 problems on or shortly after the new millennium.

The Year 2000 problem came about decades ago when software programmers, to save expensive memory space at the time, used two digits rather than four to represent years in date-sensitive calculations. With older applications, including many basic operating systems, the year 1998 is represented by the number 98. Such computers and software may read "00" two-digit date fields for 2000 as 1900.

Loan officers, when making their credit analysis, may want to consider looking at the borrowers' Year 2000 conversion efforts and the potential for significant operational problems to occur because their computer systems are not in compliance. You may also want to include Year 2000 compliance language in your loan documentation and include a formal questionnaire into underwriting criteria.

On the bright side, you can look at assessing your corporate borrowers as a business opportunity. Not only will you be better able to estimate your bank's potential credit risk, you can also provide a service to your customers by increasing their Year 2000 awareness.

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