Contents
FDIC
Banking
Review
1997
Volume 10, No. 2
Chairman
Andrew C. Hove, Jr.
Division of Research
and Statistics,
Director
Wm. Roger Watson
Deputy Directors
Barry Kolatch
Steven A. Seelig
Editor
Steven A. Seelig
Editorial Committee
Jack T. Reidhill
Detta Voesar
Managing Editor
Detta Voesar
Editorial Secretary
Cathy Wright
Design and Production
Geri Bonebrake
The views expressed are
those of the authors and do
not necessarily reflect offi
cial positions of the Federal
Deposit Insurance Corpora
tion. Articles may be re
printed or abstracted if the
FDIC Banking Review and
author(s) are credited.
Please provide the FDIC’s
Division of Research and
Statistics with a copy of any
publications containing
reprinted material.
Single-copy subscriptions
are available to the public
free of charge. Requests for
subscriptions, back issues
or address changes should
be mailed to: FDIC Banking
Review, Office of Corporate
Communications, Federal
Deposit Insurance Corpora
tion, 550 17th Street, N.W.,
Washington, DC, 20429.
What Every Loan Officer Needs to Know about the Year 2000
Computer Problem (But Doesn’t Know How to Ask)
by Jay Golter and Paloma Hawry Page 1
The purpose of this article is to explain the nature of the Year 2000 problem and
the dangers it can create for different organizations. The authors discuss the types
of risk that emanate from these system problems and propose a process by which
a bank’s loan department may establish policies to assess and mitigate credit risk
resulting from Year 2000 issues.
Small Business Credit Markets:
Why do we know so little about them?
by Katherine Samolyk Page 14
This study discusses the characteristics of firms, lenders, loans, and financial
markets that can affect the availability, quantity, and price of credit to a small
business. These are the characteristics on which researchers need data in order to
test hypotheses about small business credit markets and, in particular, about the
two central issues the author focuses on: To what extent do relationships with
lenders affect the credit conditions faced by small businesses, and how will bank
consolidation affect credit availability to smaller business borrowers.
Recent Developments Affecting Depository Institutions
by Jane Coburn Page 33
This regular feature of the FDIC Banking Review contains information on regulatory
agency actions, state legislation and regulation, and articles and studies pertinent
to banking and deposit insurance issues.
FDIC
Banking
Review
1997
Volume 10, No. 2
Chairman
Andrew C. Hove, Jr.
Division of Research
and Statistics,
Director
Wm. Roger Watson
Deputy Directors
Barry Kolatch
Steven A. Seelig
Editor
Steven A. Seelig
Editorial Committee
Jack T. Reidhill
Detta Voesar
Managing Editor
Detta Voesar
Editorial Secretary
Cathy Wright
Design and Production
Geri Bonebrake
The views expressed are
those of the authors and do
not necessarily reflect offi
cial positions of the Federal
Deposit Insurance Corpora
tion. Articles may be re
printed or abstracted if the
FDIC Banking Review and
author(s) are credited.
Please provide the FDIC’s
Division of Research and
Statistics with a copy of any
publications containing
reprinted material.
Single-copy subscriptions
are available to the public
free of charge. Requests for
subscriptions, back issues
or address changes should
be mailed to: FDIC Banking
Review, Office of Corporate
Communications, Federal
Deposit Insurance Corpora
tion, 550 17th Street, N.W.,
Washington, DC, 20429.
What Every Loan Officer Needs to Know about the Year 2000
Computer Problem (But Doesn’t Know How to Ask)
by Jay Golter and Paloma Hawry Page 1
The purpose of this article is to explain the nature of the Year 2000 problem and
the dangers it can create for different organizations. The authors discuss the types
of risk that emanate from these system problems and propose a process by which
a bank’s loan department may establish policies to assess and mitigate credit risk
resulting from Year 2000 issues.
Small Business Credit Markets:
Why do we know so little about them?
by Katherine Samolyk Page 14
This study discusses the characteristics of firms, lenders, loans, and financial
markets that can affect the availability, quantity, and price of credit to a small
business. These are the characteristics on which researchers need data in order to
test hypotheses about small business credit markets and, in particular, about the
two central issues the author focuses on: To what extent do relationships with
lenders affect the credit conditions faced by small businesses, and how will bank
consolidation affect credit availability to smaller business borrowers.
Recent Developments Affecting Depository Institutions
by Jane Coburn Page 33
This regular feature of the FDIC Banking Review contains information on regulatory
agency actions, state legislation and regulation, and articles and studies pertinent
to banking and deposit insurance issues.
Year 2000
What Every Loan Officer
Needs to Know about the
Year 2000 Computer Problem
(But Doesn’t Know How to Ask)
by Jay Golter and Paloma Hawry*
On May 5, 1997, the Federal Financial Institu
tions Examination Council (FFIEC) issued
an inter-agency statement about the Year
2000 problem, giving guidance on what financial in
stitutions need to do to assure that they do not suffer
serious computer-system failures related to the
change of century on New Year’s Day 2000. 1 One
section of the statement specifically addressed the
potential credit risks that could arise from a borrow
er’s inability to manage its own Year 2000 compliance
efforts successfully:
“Financial institutions should develop processes to
periodically assess large corporate customer Year
2000 efforts and may consider writing Year 2000
compliance into their loan documentation. Loan
and credit review officers should consider in their
credit analysis of large corporate customers whether
the borrower’s Year 2000 conversion efforts are suffi
cient to avoid significant disruptions to operations.”
(FFIEC (1997), 4.)
Moreover, the FFIEC anticipates issuing further
guidance on Year 2000 issues, including those related to
credit risk. Analyzing the scope of any firm’s Year 2000
challenges is difficult for professional systems consul
tants, let alone for the typical loan review officer, who
has a limited understanding of computer programming
and systems integration and might feel ill-equipped to
conduct the type of analysis called for in the inter-
agency statement. The purpose of this article is to ex
plain the nature of the Year 2000 problem and the
dangers it can create for different organizations. The
article discusses the types of risk that emanate from
these system problems and proposes a process by
which a bank’s loan department may establish policies
to assess and mitigate credit risk resulting from Year
2000 issues. A list of reference materials is also includ
ed.
ORIGIN AND NATURE OF THE
PROBLEM
In the Stanley Kubrick science fiction movie2001: A
Space Odyssey , the computerized system operating a
manned spacecraft has to be disconnected when it
turns against the crew. One year earlier than predicted
by the movie’s title, many businesses may also find that
their computers have turned against them, as many
systems on which people depend cease to operate cor
rectly. The problem lies in the inability of some com
puters to interpret correctly dates in which the year
does not begin with 19—and failure to correct the
problem before the immutable deadline could have
dire results for any firm. In fact, many computer in
dustry experts believe that unless firms have already
made significant progress fixing the problem it is now
too late for some of them to survive.2
*Jay Golter is a financial analyst in the FDIC’s Division of Research and
Statistics. Paloma Hawry is a manager at the Actoras Consulting Group
in Shaumburg, IL. The views and opinions are those of the authors and
not necessarily those of the FDIC. Nothing in this article constitutes
FDIC policy.
The authors wish to thank John McIsaac, Cory Hamasaki and James Jar
rell for reviewing early drafts of this article and providing useful in
sights. Steven Seelig, Jack Reidhill, Jane Lewin and Detta Voesar also
provided editorial assistance.
1The authors’ opinions, interpretations and representations regarding
the FFIEC and its statements and policies, including the May 5 state
ment, are not to be relied on as FFIEC policy. The sole source of
FFIEC policy is the FFIEC.
2For example, see Peter de Jager’s remarks in Levy and Hafner (1997).
1
What Every Loan Officer
Needs to Know about the
Year 2000 Computer Problem
(But Doesn’t Know How to Ask)
by Jay Golter and Paloma Hawry*
On May 5, 1997, the Federal Financial Institu
tions Examination Council (FFIEC) issued
an inter-agency statement about the Year
2000 problem, giving guidance on what financial in
stitutions need to do to assure that they do not suffer
serious computer-system failures related to the
change of century on New Year’s Day 2000. 1 One
section of the statement specifically addressed the
potential credit risks that could arise from a borrow
er’s inability to manage its own Year 2000 compliance
efforts successfully:
“Financial institutions should develop processes to
periodically assess large corporate customer Year
2000 efforts and may consider writing Year 2000
compliance into their loan documentation. Loan
and credit review officers should consider in their
credit analysis of large corporate customers whether
the borrower’s Year 2000 conversion efforts are suffi
cient to avoid significant disruptions to operations.”
(FFIEC (1997), 4.)
Moreover, the FFIEC anticipates issuing further
guidance on Year 2000 issues, including those related to
credit risk. Analyzing the scope of any firm’s Year 2000
challenges is difficult for professional systems consul
tants, let alone for the typical loan review officer, who
has a limited understanding of computer programming
and systems integration and might feel ill-equipped to
conduct the type of analysis called for in the inter-
agency statement. The purpose of this article is to ex
plain the nature of the Year 2000 problem and the
dangers it can create for different organizations. The
article discusses the types of risk that emanate from
these system problems and proposes a process by
which a bank’s loan department may establish policies
to assess and mitigate credit risk resulting from Year
2000 issues. A list of reference materials is also includ
ed.
ORIGIN AND NATURE OF THE
PROBLEM
In the Stanley Kubrick science fiction movie2001: A
Space Odyssey , the computerized system operating a
manned spacecraft has to be disconnected when it
turns against the crew. One year earlier than predicted
by the movie’s title, many businesses may also find that
their computers have turned against them, as many
systems on which people depend cease to operate cor
rectly. The problem lies in the inability of some com
puters to interpret correctly dates in which the year
does not begin with 19—and failure to correct the
problem before the immutable deadline could have
dire results for any firm. In fact, many computer in
dustry experts believe that unless firms have already
made significant progress fixing the problem it is now
too late for some of them to survive.2
*Jay Golter is a financial analyst in the FDIC’s Division of Research and
Statistics. Paloma Hawry is a manager at the Actoras Consulting Group
in Shaumburg, IL. The views and opinions are those of the authors and
not necessarily those of the FDIC. Nothing in this article constitutes
FDIC policy.
The authors wish to thank John McIsaac, Cory Hamasaki and James Jar
rell for reviewing early drafts of this article and providing useful in
sights. Steven Seelig, Jack Reidhill, Jane Lewin and Detta Voesar also
provided editorial assistance.
1The authors’ opinions, interpretations and representations regarding
the FFIEC and its statements and policies, including the May 5 state
ment, are not to be relied on as FFIEC policy. The sole source of
FFIEC policy is the FFIEC.
2For example, see Peter de Jager’s remarks in Levy and Hafner (1997).
1