Small and medium-size banks with significant year-2000 problems could soon see their credit ratings fall, Moody's Investors Service warned last week.

At particular risk are smaller banks that plan to escape their year-2000 problems by being acquired, the ratings agency found.

As early as this fall, Moody's expects banks to become less willing to buy banks infested with the so-called millennium bug, fearing they will not have enough time to fix the computer systems.

"Nineteen ninety-nine could be the year of the Big Chill for M&A activity in the industry," said Ryan O'Connell, senior vice president at Moody's and the report's author.

A bank that manages to find a last-minute buyer may have to accept a "painful discount" in the purchase price, the report said.

Small and medium-size banks planning to pay for their own fixes are also at risk of a ratings dip, the report said. Though large banks should easily absorb such costs, smaller institutions might see their profits clipped.

But Moody's will increase its focus on year-2000 during the next six months, though it has not yet downgraded any banks for millennium problems. "Going forward, that will be a topic of conversation with every bank that we rate," he said.

In evaluating a bank's year-2000 readiness, Moody's will look at such factors as "what they say, what they have done, how much they're spending, and how many people they have" on the project, Mr. O'Connell said.

-Scott Barancik

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