The Problem of the Century

Surveys indicate that despite almost universal recognition of banks as champions of year 2000 preparation, some people are planning to withdraw some or all of their money toward the end of the yearu00e2u20ac”just to be on the safe side. Then, when the coast is clear, they’ll redeposit it. From a customer’s standpoint, this sounds relatively painless.

But from a bank’s perspective, it’s a promise that, soon, someone’s going to remove some unnamed quantity of blood from your circulatory system, hold it for awhile, and then put it back. Which naturally prompts banks to wonder: How much blood? Is there any way to prevent this? How does one prepare for such an unsavory operation?

Trouble is, there’s no sure way to predict whether this will be a mild prick or a real hemorrhage.

Thomas Lavelle, spokesman at the Federal Reserve Bank of Boston, echoes many regulators and bankers when he says, almost breezily: “I wouldn’t be surprised if folks kept a little extra cash, as they always do, for the holidays. I don’t think people will withdraw their money from interest-bearing accounts.” But such nonchalance seems disproportionate to the news that the Fed has ordered the Bureau of Engraving and Printing to crank out $50 billion extra in large bills and possibly delay the destruction of old bills. At the end of next year, there should be $460 billion in circulation and $200 billionu00e2u20ac”up from the usual $150 billionu00e2u20ac”in reserve. Lavelle says the Fed is disinclined to speculate how much cash people might require.

Donald Ward, executive vice president of operations and systems for the $7.6 billion Bank of the West, Walnut Creek, California, sums up what appears to be the industry philosophy: “The focus needs to be that there’s no reason to panic. If [customers] see bankers saying, ‘We need to get ready for a panic,’ it could create one.”

Ironically, from bankers and regulatorsu00e2u20ac”two groups that typically don’t see eye to eyeu00e2u20ac”the line seems to be unbroken: The banks, they say, will work. Even if nothing else does. And if there are problems, the bankers will fix them over the weekend. If people want extra cash to get them through the new year, then the Bureau of Engraving is taking care of that. And in a worst-case scenario, the regulators will come and take over the bank in the same seamless fashion they learned during the bank and thrift crisis of the 1980s.

No sweat.

Better safe than sorry

No sweat for customers, maybe. For directors, there’s still plenty to worry about. An October newsletter from the FDIC reiterated the liability of directors if a bank fails to prepare for Y2K.

“If a bank is found unable to become Y2K ready, or it fails because of lack of year 2000 readiness,” the report says, part of the FDIC’s responsibility will be to determine whether management and/or the board of directors was responsible. Among the questions that would be addressed:

u Did the board educate itself about Y2K and the risks it posed?

u How actively was the board involved in the drafting and consideration of the plan?

u Do the board minutes or other documentation indicate that the directors asked appropriate questions about the risks posed and about the plans being considered?

Regulators won’t be the only ones scrutinizing the activities of the board. Everyone from lawyers to computer geeks who can serve as expert witnesses are crowing that the year 2000 date change will be the litigation event of all history.

Part of getting ready for the year 2000 includes making sure the bank has enough cash on hand to satisfy any number of anxious depositors. It also means making sure that if extra cash is required, systems are in place to obtain the cash quickly and that the demand for armored cars delivering the precious greenbacks does not dangerously slow their arrivalu00e2u20ac”like the demand for taxis during a snowstorm.

Unfortunately, banks really have very little to go by when figuring how much cash to have in reserve. Lou Marcoccio, research director of the Stamford, Connecticut-based GartnerGroup, a worldwide business and information technology company, gave expert testimony before the U.S. Senate last October recommending that all Americans have on hand enough cash to live on for about two weeks. Other Y2K experts have suggested more.

An Internet survey conducted last fall by Harris Poll and ZDNN comprised of more than 6,300 people, most of whom work in information technology, revealed that nearly 60% intended to withdraw at least 40% of their money and 20% intended to withdraw all their money from banks. Harris admitted that its results were not sufficiently scientific to extrapolate a trend regarding the general public. And it stated clearly that banks are the safest place for money to be. Still, the poll’s summary concluded: “Clearly, the banks face a very important challenge in educating customers about the reliability of their systems. If they fail to do so, there is a strong chance that fears of a bank failure will become self-fulfilling prophecies.”

At $325 million Danvers Savings Bank in Danvers, Massachusetts management is planning to have “two to three times as much cash on hand” at the end of 1999, says chief financial officer Mark Panella. “We are prepared for an Armageddon scenario, [to be prepared] even if every large depositor of the bank pulls out every dollar. The largest depositor in the bank only has 2% of the bank’s deposits.”

And with all that cash on hand, Panella says, they will need a couple of extra security guards. “We are going to incur some nasty little costs to do this. But we are going to do it.”

Bank of the West’s Ward notes that, as with most bankers, his bank is watching the balances of its customers, looking for trends. “We know what happens on payday and how much extra cash is needed. We might look and see, ‘how many households do we have? If each household has to have $500 on hand, how much cash will we need?’”

At Union Planters Corp., an $18 billion institution based in Memphis, vice president in corporate services Lloyd DeVeaux is circumspect about just how much cash they might have around but says that with all the acquisitions the bank has done in recent years, they’ve developed “good cash-inventory forecasting.”

“As we get closer to the time, there will be actual formulas,” DeVeaux says, “[perhaps] 20% or 12% reserve, though I don’t think it will need to be that high.”

Ward believes that banks won’t be able to determine how much cash they’ll need on hand for some months. “We are expecting there may be some general guidelines set forth,” he says. “Consumer behavior changes. We can wait until later in 1999 when we have a better chance of assessing public sentiment. We’re all spending a great deal of time making sure the system will work. But we’ll be putting our ears to the ground to make adjustments if we need to.”

Give ’em the high sign

Right now the industry focus seems to point less at preparing for a lot of withdrawals than on communicating that such action won’t be necessary.

Frank Hartigan, project manager for the FDIC’s year 2000 initiative, says a director has two important tasks. One is to make sure the bank is compliant. The other is to ensure that the bank’s readiness is communicated to customers.

Already most banks are calling their biggest customers personally and communicating with the rest via statement stuffers, lobby posters, and websites. Panella says the year 2000 area is the most popular “hit” on Danvers Savings Bank’s site. And DeVeaux at Union Planters says that the company has budgeted about $60,000 just for public awareness campaigns about the bank’s Y2K efforts. The FDIC recommends banks become prodigious communicators on this topic with mailings, advertisements, outreach meetings and seminars to customers and community groups, and employee training. Among unusual efforts to communicate Y2K readiness reported by the FDIC was one bank that held a breakfast for customers and another that adopted the motto: “Come Celebrate With Us.”

Jim Fleischer, a partner with the Washington, D.C. firm of Silver, Freedman & Taff, which specializes in work for financial institutions, says several of his clients plan to pile mountains of bills in teller windows in December to boost customers’ confidence.

“You can stack $1 bills awfully high and awfully deep without it being a lot of money,” Fleischer says.

Information wars

Even after all this, bankers face a problem. Their information is being met with volleys by a number of other sources: friends and family, the Internet, the pulpit, the news media, andu00e2u20ac”doubtless, before all is said and doneu00e2u20ac”Hollywood. And not all of this information engenders confidence in the banking system.

For example, in his aforementioned testimony to the U.S. Senate, Marcoccio of the GartnerGroup stated: “The GartnerGroup considers it plausible thatu00e2u20ac”around December 1999 and January 2000u00e2u20ac”several central banks might issue withdrawal restrictions or a partial “freezing” of some accounts, or some areas might have to endure a few days without banks being open. This scenario must be taken into consideration.”

It’s understandable that informationu00e2u20ac”and hypeboleu00e2u20ac”about the enormity of the year 2000 task can only serve to encourage cash hoarding. In a late-November edition of “60 Minutes,” the reporter interviewed CapGemini, an international technology company whose clients are largely banks trying to kill the millennium bug. The report noted that one missed line from more than a million lines of computer code coming from just one bank could cause the bank’s whole system to seize up.

Thus, rumors abound. One Y2K-devoted website predicts that the government will pass anti-hoarding laws. Others worry that if the federal government isn’t up to snuff, the FDIC could take months to pay claims on behalf of depositors. (The FDIC’s Frank Hartigan denies this). Another prediction is that retailers will offer significant discounts in December for purchases transacted in cash. Finally, there are constant, ominous reminders by Y2K leaders that this event is unprecedented and that “no one really knows what will happen when the clock strikes 12.”

Easy as it may be for insiders to brush aside such notions, some members of the public will likely weigh the assertions more seriously.

Because there are so many incentives to withdraw money, banks have to do more than merely reassure customers about their preparation, says Mark L. O’Dell, director of the year 2000 bank supervision policy for the Office of the Comptroller of Currency.

“They must provide a more balanced view of the risks” such as pointing out that “to take money out of the bank is not risk free.” There are, O’Dell says, “unsavory characters” who would be glad to find one’s money under the mattress.

“This is the kind of effective dual message we believe will be needed,” O’Dell says.

And in the end, it may be this fear that renders the other impotent. There are doomsday predictions that that the streets will be filled with looters, the 911 system will fail, and the military will be prevailed upon to keep civil order. Under such circumstances, the cash under the mattress idea seems none too safe. Consequently, this part of the message may have more impact than all of the other assurances the bank can give.

Of course, it could be, considers L. William Seidman, former chairman of the FDIC and RTC, that a few people panicking will be just that, not a run at all.

“In the 1980s, a few people came in and asked for their money and that was the end of the panic,” recalls Seidman. “And back then, people really did have to wonder if they would get their money.”

In the meantime, just to be prudent, directors have one beast of a puzzle to solve. How much money will a couple hundred million people, in varying states of anxiety and liquidity, pull out of America’s banking system?

“These are questions,” says Seidman, “to which there are no answers. No one in this world has ever tried this before.”