Banks confident on Y2K

By Richard Braddell

WELLINGTON - The Reserve Bank believes business failures caused by the Year 2000 computer problem will result in only modest loan losses for banks.

Losses are likely to be relatively low because substantial parts of bank lending portfolios are in mortgages and personal loans that are not directly affected by Year 2000 problems, it says.

"We believe that most large companies are adequately addressing the issue and that, as a result, there will not be major loan-loss problems," said Deputy Governor Rod Carr.

"Small businesses, in the main, are not heavily dependent on computers and should be able to work around problems using manual solutions."

But the bank recognised that there could be problems with medium-sized businesses, although the importance being placed on their Y2K preparedness in bank credit assessments was putting pressure on them to address the issue.

Where progress was inadequate, the banks would doubtless reduce their exposures to those businesses, the Reserve Bank said.

It assured depositors yesterday that there was no reason for them to withdraw savings in anticipation of Year 2000 problems.

"Bank failures also don't fit the facts. Banks fail when their bad debts are so great that their capital is lost or their liquidity runs short," Dr Carr said.

"Banks in New Zealand are robust and potential debt losses from Y2K business failures would be insufficient to threaten bank solvency."

He said it made no sense to withdraw money out of fear that bank computer records might be lost or that withdrawals on a large scale could cause banks to collapse.

The banks were in the final stages of exhaustive testing of their computer systems and already maintained multiple backups of their records to cover power failures and other disruptions, said Dr Carr.

To cope with any unusual demand for cash at the millennium, the Reserve Bank plans to boost the $4 billion in bank notes normally in circulation around Christmas to about $6.5 billion.

To do so, the bank will not destroy paper notes that will be withdrawn this year in readiness for the new issue of polymer notes.

While the bank conceded that the Year 2000 problem was serious, it said the banking sector was taking all necessary steps and was ensuring that it was not exposed to international failures.

"The public can be assured that ... the banking system will continue to be something they can rely on."