Millennium bug may prove costly for banks

The Millennium bug could cause a significant liquidity shortage and disruption in financial markets due to shortcomings in Year 2000 preparations, according to a new report by TCA Consulting.

The report warns that many banks have concentrated their efforts on preparing their internal IT networks and infrastructure for Y2K and have not addressed the wider business risks posed by the possible failure of external parties.

The report states that: “The true cost of failure is far greater than that which can be readily calculated.”

In the report, Year 2000 – seeing the whole picture, TCA recommends that banks broaden the focus of their preparations for Y2K. John Turner, principal consultant at TCA Consulting explained: “Liquidity is dependent not just on payment, but timely payment. Even a very short delay could cause significant problems for a bank’s trading partners, and if widespread, for the banking system as a whole. Regulatory bodies in the UK have threatened to penalise banks heavily for any lack of preparedness for Y2K.

The report warns that banks must also consider how to protect themselves from the failure of counterparties to make payments or settle transactions.

Turner said: “As the saying goes; if you owe the bank #100, you are in trouble. If you owe the bank #100m, the bank is in trouble. If counterparties stricken with Y2K problems failed to make payments totalling #100m, then the whole banking system would definitely be in trouble.”