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David Iacino is the Senior Manager of the Millennium Project of the Bank of Boston, which is widely regarded as being ahead of all other major money center banks in its compliance efforts. On July 10, he testified to the Subcommittee on Financial Services and Technology of the Senate Banking Committee. He painted a grim picture.
First, the main problem: the interdependence of banks. It is a long paragraph because the risk is total.
"Financial institutions are extremely dependent on one another as well as common service providers for the interchange of electronic commerce. The national payment system is dependent upon automation to clear checks principally through the Federal Reserve System. The Automated Clearing Houses represent the primary means of processing pre-authorized payments enabling automated payroll deposits to the consumer's Bank of choice in addition to processing standing orders for repetitive payments such as insurance premiums, automobile payments, and investments. The retail consumer is dependent on the use of credit and debit card conveniences offered internationally through suppliers such as VISA, MASTERCARD, and AMERICAN EXPRESS which have extensive electronic networks linking a transaction from its point of sale to the consumer's financial institution. The Corporate customer, heavily dependent on Electronic Data Interchange (EDI), Wire Transfers, and Letters of Credit, uses the nation's financial institutions as their financial intermediaries. The increasing globalization of the business enterprise radiates these dependencies beyond our borders to include financial institutions worldwide. It should be clear from these examples that there are significant risks associated with such tightly woven interdependencies" (p. 1).
Here is how he described his own bank's situation:
"Like all financial institutions, BankBoston is heavily dependent on computer technology in the conduct of our business. We have major Data Centers in New England, London, Brazil, Argentina, and Singapore with large scale data communications networks linking these Centers to our branches, remote offices, customers, and service providers like the Federal Reserve. Additionally, we participate in multiple delivery networks for ATM processing, point of sale services, information exchange, and other forms of electronic commerce. This dependence on technology was the prime motivation for BankBoston to begin its Millennium Project in the Spring of 1995" (p. 2).
Note when they began the project -- not the repairs, mind you: the project. Spring, 1995. Social Security began its project in 1989 and began repairing code in 1991. It is still not compliant.
Mr. Iacino then described another highly vulnerable aspect of his bank. What he describes here applies to almost all institutions on earth: dependence on vendor software.
"The initial assessment of our systems inventory revealed that roughly fifty percent of our software is supplied to us by external Vendors, and that this Vendor supplied software is usually customized to meet the unique needs of our institution. This heavy reliance on external Vendor software, which is common within the financial services industry, represents the single biggest risk in being able to meet the millennium challenge since the timely delivery of this millennium compliant software is outside of each bank's control. However, even managing these types of software risks that are germane to individual institutions will help ensure millennium compliance only within their own spheres of influence" (p. 2).
What if the vendors can't fix it? They're out of business. But so is every institution that relied on them.
Will your employer get loans to keep the doors open? Not if it is not comliant. Then there is the question of your employrer's suppliers. And its buyers. Are they compliant? BankBoston says it pays close attention to such matters.
"Credit policy is being reviewed to account for the potential risk that the borrower's ability to repay outstanding debt may be affected by the impact of the year 2000 on the borrower. Increased allowances for potential loan losses are accordingly being evaluated. Existing loans requiring customer unqualified financial statements are being watched in the event that the customer's own millennium preparation expense may erode comfortable profit margins. Loan participations and syndications require the cooperation of all participants in the evaluation of millennium related risk" (p. 3).
So, where are we? Are the instititions we rely on for our very lives going to make it? I take no comfort from his assessment:
"The majority of the critical work, however, lies ahead. As I mentioned earlier, there is an enormous interdependency among all financial institutions on the viability of the payments system. All must be prepared for the millennium. All common financial services providers must be prepared. All systems and application vendors must be prepared. All suppliers and customers must be prepared. And then we must all test the interdependencies we share well before the year 2000 to ensure stability of the system not only domestically, but also globally" (p. 4).
I don't think there is any possibility that this can be done, let alone will be done.
So, I have bought a small rural property in NW Arkansas. It will be as self-sufficient as possible by mid-1998. I do not plan to have more than a month's income in any bank on June 30, 1998. You must decide what's good for you.
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