Banks seem to be making good progress fixing the millennium bug-doing things they can control.
Their customers and suppliers are another matter entirely.
In a document recently filed with the Securities and Exchange Commission, Mellon Bank Corp. gives a glimpse into how much there is to fear if banks' customers and vendors fail to address the year-2000 problem in a timely way.
Mellon said it may spend as much as $95 million on year-2000 costs, 40% of that in 1999. That was not seen as materially affecting earnings. The Pittsburgh company said it has completed about 90% of its systems testing related to 2000.
However, Mellon noted that it could be affected by what government agencies, business customers, and vendors do or fail to do. To reduce its exposure, Mellon is contacting its most significant suppliers to learn about their year-2000 plans and testing schedules.
The $50.8 billion-asset Mellon, one of the biggest asset managers among banking companies, is dependent on a number of technology outsourcing companies.
"We're working with them," said Stephen Dishart, a Mellon spokesman. "A major part of the process was identifying those mission-critical third- party vendors and other significant third parties."
Mellon also said its greatest risks may lie among the foreign companies with which it does business. "It is generally believed that non-U.S. businesses may not be addressing their year-2000 issues on as timely a basis as U.S. businesses," the company said in its SEC filing.
Noting that the year-2000 challenge "is an unprecedented event," Mellon said outside companies that do business with it could cause "business disruptions, operational problems, financial losses, legal liability, and similar risks, and the corporation's business, results of operations, and financial position could be materially adversely affected."
The government has said banks are generally well prepared for 2000, when many computers may misunderstand the date and operate as if it were 1900. The Federal Deposit Insurance Corp. reported in January that 97% of the banks and thrifts it regulates were rated "satisfactory" on the millennium date change. Only 16 were rated "unsatisfactory."
Analyst Joseph Duwan of Keefe, Bruyette & Woods Inc. said most of the language in Mellon's disclosure is "boilerplate," but he said that does not diminish the critical issue of vendor and customer readiness.
In September, Amsouth Bancorp. of Birmingham, Ala., said it had added $9.5 million to its loan-loss reserve for possible borrower defaults tied to the millennium bug. The $20 billion-asset company was considered extremely prudent, drawing praise from an analyst.
"It was extremely conservative," said Eric Rothmann of Stephens Inc. in Little Rock, Ark., "but if they don't have a problem, they won't have to raise their provision for a while. It was a very smart move."