The Federal Financial Institutions Examination Council (FFIEC) released the attached safety and soundness guidance on business credit risk posed by the Year 2000 problem. The guidance discusses the expectations of financial institutions’ Year 2000 efforts and identifies the responsibilities of senior management and board of directors for addressing risks associated with the Year 2000. This includes managing internal and external risks presented by providers of data-processing products and services, business partners, counterparties, and major loan customers.
The FFIEC interagency task group released an Interagency Statement in May 1997 that outlined the procedures that regulatory agencies plan to use to determine Year 2000 risk at financial institutions. While the majority of these detailed procedures focus on an institution’s awareness and actions related to internal and external systems, the statement also stressed that an institution’s customers face Year 2000 issues that could negatively affect a financial institution’s credit or loan portfolio.
The guidance recommends that credit unions develop processes to identify, assess, and control the potential Year 2000 credit risk in their commercial or member business loan portfolios. Furthermore, it recommends that loan and credit approval personnel consider when analyzing a commercial borrower, whether the borrower’s Year 2000 conversion efforts are sufficient to avoid significant disruptions to their operations.
Commercial borrowers may not be aware of the many systems and equipment in their operations that could be adversely affected in the Year 2000. Thus, the Year 2000 presents credit unions a challenge to determine the incremental credit risk in member business loan portfolios relating to individual commercial borrower’s understanding of 2 Year 2000 issues. Concurrently, credit unions must gain a better understanding of the credit risk implications in their member business loan portfolios.
The NCUA takes its Year 2000 responsibilities very seriously and we know that credit unions share our concerns. The potential for a major disruption to credit union operations due to a failure to address this issue is considerable, and we strongly encourage you to give it your highest priority.
If you have any questions about this issue, the interagency policy statement, or our examination approach, please contact your examiner, regional office, or state supervisory authority, for state credit unions.
Norman E. D’Amours