Credit risk roadmap
millennium
What'sNewS Issue 8-August 1998
The very real challenges associated
with the Year 2000 (Y2K) or so-called
'millennium bug' are now widely
appreciated among banks and
regulatory authorities: failure to
address this area of profound
systemic vulnerability could risk a
company's going out of business,
temporarily or even permanently.
As a relationship bank, the real risks
may lie in our clients' systems - a
factor our credit risk team is well
on the road to solving.
Impending risks
Clearing up problems
Millennium
Roadmap
Model checklist
Room for
improvement
Initial assessments of millennium risk
have generally tended to concentrate on
the degree to which internal systems were
insulated from the Y2K disturbance,
which is caused by the incapacity of older
computers and software systems to
recognize the year 2000 as a valid date.
However, it has also become apparent
that - in an electronically networked
economy - one can also be vulnerable to
risks generated by a clients' systems as
well. A vast number of electronic-based
systems are vulnerable to this Y2K
problem, especially those that depend on
so-called 'embedded circuits', where the
instruction-set is 'burnt in' and therefore
cannot be reprogrammed. There are five
times as many such chips as there are
human beings in the world - an
indication of the scale of the problem
involved - and many of these circuits are
crucial to the continued functioning of
medical equipment, logistics systems,
power generation, and countless other
essential functions.
Most larger multinationals are already
well advanced in their Y2K preparations.
Many important small and medium-sized
clients have recognized the importance of
this issue - but governments have lagged
behind. Both governments and many
businesses have yet to develop a project
organization or allocate a budget in
response. Much is at stake. For example,
a poultry producers' failure to adequately
Y2K-proof its systems could result in an
entire batch of freshly slaughtered
chickens being rejected as unfit for
consumption: computer bar-codes could
interpret them as being a century old.
This, in turn, would raise the prospect of
credit default for that producers' main
relationship banks.
Recently, almost by accident, the extent of
the Y2K risks being run by one customer,
a South African fruit exporter, was
discovered when a member of the RI
Credit Committee (RICC) was visiting
that cliënt. It emerged that almost every
aspect of the clients'
business was
vulnerable to
disruption - and
several loan
applications were
subsequently delayed.
The problem in
South Africa has
since been resolved,
but it highlights the
need to get a better
grip on the Y2K
(credit) risks
associated with our
global customer base.
Henceforrh an
assessment of Y2K
vulnerability will be
expected as a
Standard part of the
credit risk assess-ment. The policy
research desk within our global credit risk
management arm has produced a so-called
Millennium Roadmap designed to help
relationship managers and credit analysts,
who have primary responsibility for
generating credit risk assessments. The
document includes a 'Y2K toolkit' with
in-structions on how to rank potential
customer credit risks. Among the factors
considered essential in the ranking process
are: the size of our exposure, the nature of
our relationship (whether we are a prime
or secondary bank for this cliënt), and the
extent of their systemic dependence on
vulnerable systems.
There is a model checklist with questions
that relationship managers can use when
approaching their customers on this issue.
There is also a legal clause for insertion in
new loan documentation and a letter to
third parties about Rabobank's own
millennium compliance efforts. 'This is
a terribly important project,' says Bert
Sperna Weiland of global credit risk
management. 'Since the deadline can't be
moved, addressing the Y2K challenge
could be a life and death issue for many
customers worldwide. As a relationship
bank, it is not only a matter of our own
protection but also a responsibility to our
clients to be proactive and alert about
these risks.'
Already, about
half of the loan
applications
that come
before the RICC
take account of
the Y2K issue,
Sperna Weiland
says. New York
and London
have been
particularly A
good. But in
general the
assessments
have been
inconsistent in
substance, and
there is room
for regional
improvement as well, not least from Asia.
'If we have a cliënt in Indonesia, for
example, they may well have other
pressing worries that have distracted
them from addressing the millennium
bug,' says Sperna Weiland. 'This is
understandable but un-acceptable.
The Dutch Central Bank, which of course
monitors the activity of all our branches
worldwide, has now signalled its intent
to imminently and sharply review all
credits of Dutch banks with an eye
towards millennium compliance. 'We
cannot afford to be complacent with
this issue.'
For information call 31 30 216 4428.
Bert Sperna Weiland - Y2K already
a credit issue