Year-2000 glitches in the global financial infrastructure could leave even well-prepared U.S. banks vulnerable to problems, witnesses at a House Banking Committee hearing said Tuesday.
"No matter how well-prepared American banks and businesses are for the new millennium," said committee Chairman Jim Leach, "it is difficult to imagine how our banking systems and domestic economy can escape the consequences of a weak link" in the global chain.
In fact, the Iowa Republican added, competitive advantages anticipated by American banks located overseas might be "fleeting" if there are "broad, systemic" problems in international banking.
John R. Towers, executive vice president at State Street Corp., Boston, concurred. To rectify its exposure to international risks, State Street is monitoring the year-2000 compliance efforts of more than 100 banks it works with in 83 markets, according to Mr. Towers.
"We rely on these subcustodian relationships for the settlement, safekeeping, and servicing of assets" in other countries, he said.
Ernest T. Patrikis, first vice president of the Federal Reserve Bank of New York, used a hypothetical U.S. mutual fund-one holding foreign stocks and bonds-to illustrate the interdependence of financial markets.
To execute trades, the fund's managers would probably interact with foreign and domestic securities dealers, which would in turn rely on the year-2000 integrity of the exchanges, brokerage networks, electronic trading systems, and telecommunications in their countries.
Brokerage firms, securities depositories, clearing firms, and other financial institutions would also play a role in the mutual fund's dealings. If stricken with year-2000 errors, any one of these could choke the fund's operations, Mr. Patrikis testified.
Several witnesses at the hearing said that to address systemic risks, banks must move beyond testing their own systems and engage in "external" testing-that is, test-drive their connections with payment systems and other financial conduits.
John R. Mohr, executive vice president of the New York Clearing House, said his group is facilitating such year-2000 tests.
Since early this year, it has let participating banks test the Clearing House Interbank Payments System on a daily basis.
He said the first mandatory test for Chips, Fed Wire, and Swift, the Society for Worldwide Interbank Financial Telecommunication, is scheduled for Sept. 26.