Jan. 1, 2000, is 611 days away. For obvious reasons, it cannot be postponed.
Banks, industrial corporations, government agencies, and any other computer-operating entity by then must stamp out what has been called the millennium bug. Their computer systems will have to interpret that date as the start of the 21st century, not the 20th.
The busy technology people scrambling to "remediate," in the jargon of the field, refer to the problem by the shorthand Y2K. Their task is almost as simple to define: They must wrestle with the fact that years are represented in older computer systems by their last two digits; "00" could easily be read as 1900, which could wipe a lot of outstanding loans off bankers' books.
The banking industry alone, saddled with lots of legacy mainframe systems with millions of lines of code to pore over, will spend billions of dollars on remediation and testing. Looking at the bigger picture, some experts warn that Y2K could bring the entire economy down.
To their credit, banks - particularly the biggest - are seen as ahead of the game. More than 90% of U.S. banks have started addressing the issue, according to a study by the Gartner Group of Stamford, Conn.
"They could see it coming," said Bob Cohen, communications vice president for the Information Technology Association of America in Arlington, Va. "Banks that make long-term mortgages could see that rate calculations would be problematic."
Banks still have a lot of work ahead of them. They must finish assessing their internal systems and external interfaces; thoroughly test the full range of technology operations from server computers to desktops to electronic door locks; draw up contingency plans in case of failure; and satisfy regulators' growing demands for information on Y2K projects and their timeliness.
Bankers must look at it as a business issue, not just a technical one, Steven L. Sheinheit, a senior vice president at Chase Manhattan Corp., said at a recent Bank & Financial Analysts Association symposium. They have to establish their business risks and take steps to counter them.
Financial institutions are also under orders to assess their customers' year-2000 exposures and their potential counterparty impacts. Federal Financial Institutions Examination Council guidelines require banks to fully assess customers' Y2K preparedness by Sept. 30.
Large banks are spending hundreds of millions of dollars to address the problem with in-house personnel. The banks that control 65% to 80% of the nation's assets are well into remediation and internal testing using their own veteran programers, said Clint Swift, bank technology director for the Chicago-based Bank Administration Institute.
Citicorp's disclosure in February that it would spend $600 million over three years to become year-2000 compliant gave some measure of the problem's magnitude. Other industry leaders, such as Chase, BankAmerica Corp., and NationsBank Corp., are also spending nine figures, which seem quite affordable in the current profit climate.
More concern is expressed about regional and smaller banks. Many do not have the resources to hire the necessary programers, making them dependent on outsourcing and software vendors to bring them into compliance, said Frank Hartigan, Y2K project manager for the Federal Deposit Insurance Corp.
A 1998 Grant Thornton study showed 92% of community bankers knew how their major suppliers were addressing Y2K; 44% had tested their security systems and time-sensitive vault locks; 37% had a contingency plan if major suppliers experience an interruption in their business, and 20% knew how major borrowers were addressing the problem.
The study did raise concerns about community banks' expenditures on the millennium change. The average surveyed spent about $7,000 in 1997 on the issue and expected an average outlay of $23,000 in 1998, which Grant Thornton saw as meager.
Banks that fall behind get a nudge from regulators that can become as extreme as a cease-and-desist order. The Federal Reserve Board issued one against Putnam-Greene Financial Corp. in Eatonton, Ga., last November. It put the $209 million-asset holding company under close scrutiny and sent a strong Y2K regulatory message, especially to smaller banks.
By now, all banks should have completed most of their system assessments in such areas as internal operations, vendor products, and interfaces with outside programs, experts said.
The cost of testing makes up the bulk of the work and expense. The rule of thumb has been that testing begin in 1998 so that banks can turn their attention to other later-stage requirements in 1999.
Banks that outsource their Y2K remediation - typically smaller institutions - must aggressively test the programs and not rely on vendors' promises, Mr. Hartigan said.
Regulators are keeping an eagle eye on their charges, setting deadlines and reviewing plans. They are also monitoring vendors and reminding banks of all the potential risks.
"That's a pretty strong push that other industries don't have," ITAA's Mr. Cohen said of the regulatory oversight.
Regulators will be setting additional deadlines on testing and contingency planning. The latter becomes crucial as the scale of the problem - and the risks of failing or falling short - become ever more apparent.
"We have to develop contingency plans for all possible points of failure," said David Iacino, BankBoston's millennium project senior manager.
BankBoston expects to have a plan that identifies and covers hundreds of potential failure points ready by the end of the year. Among the non technological backups under consideration are handwritten receipts and hand-delivering documents and funds.
Bankers are also looking into legal implications and ways to mitigate risks through insurance or other means. Law firms are reviewing banks' Y2K plans to make sure they meet the standard level of preparedness. Several insurance companies are establishing Y2K as a specialized coverage area.
Community Bank of Pasadena, Calif., is considering buying a bond to cover any mishaps and an insurance policy to protect directors and officers against lawsuits.
The $975 million-asset bank has fully assessed its systems and is now into the testing phase. It may be helped by the fact that DuWayne Peterson, a millennium-change expert and one-time banking technologist, is on its board. Mr. Peterson is the Pasadena-based vice chairman of Software Testing Assurance Corp. of Stamford, Conn.
But rather than be lulled into thinking the problem is licked, Community Bank officials want to be prepared for the unexpected.
"Not even the smartest people in this game know what's going to happen," John Getzelman, Community Bank's president, said. "Rather than risk finding that out late in the game, we would rather have our coverage today. That way we'd be able to cover that unknown risk."
