Banks spending millions to solve year 2000 problem.

When the clock strikes midnight on Dec. 31, 1999, don't expect to find many local bankers tipping champagne classes. Most will be in their offices, hoping - and possibly praying - that their computer systems don't crash.

Like others around the world, Los Angeles banks are racing against time to make sure that their information-technology systems, which keep track of everything from deposits to automated teller machine transactions, are free of the so-called Year 2000 bug.

Although the problem is causing headaches in a variety of industries, it is particularly troubling to bankers because of the relationship between time and money.

Widely known as Y2K, the problem stems from the fact that most systems only recognize the last two digits of a year and assume that all years start with 19. Unless replaced or reprogrammed, bank computer systems will read the year 2000 as 1900 and could crash or start spewing out incorrect information.

"Banks are nothing else but the time value of money. When you mess around with time, you open the door to massive error," said Wayne Socha, manager of the Year 200 Project at Sanwa Bank of California.

Bank accounts could suffer in various ways as a result of the problem:

* Credit cards expiring in 2000 or beyond are already being rejected by computer systems at some retail stores.

* Employee benefits are calculated based on one-year projected earnings. As a result, problems could start to emerge as early as January 1999.

* Bank computers value retirement checks by subtracting the recipient's year of birth from the current year. Subtract 1935 from 1900 and you come up with -35 years of age. No check.

Local banks are investing hundreds of millions of dollars to make sure that none of this comes to pass.

H.F. Ahmanson & Co., parent of Home Savings of America, anticipates spending $45 million toward combating Y2K over the next two years, or a little less than 0.1 percent of total assets as of the end of 1997.

Glendale Federal Bank, with assets of $16.21 billion in fiscal 1997, is looking to spend around $37 million on Y2K - or close to 0.2 percent of assets.

Sanwa Bank expects to pay $20 million, or about 0.20 percent of assets.

Various factors determine how much money needs to be spent to prepare for the coming millennium.

Size, in particular the number of deposits, becomes a key determinant. Also important is the level of information technology employed by the bank and who is responsible for maintaining it.

Glendale Federal and Sanwa both have extensive retail operations, including large branch networks, credit-card services and online banking facilities. Every teller, ATM or checking account is a potential source of Y2K problems.

With banking becoming increasingly technology-intensive, many institutions, particularly smaller ones, have opted to outsource their data storage and networking needs. By doing so, they put more of the burden of Y2K on their technology vendors.

Y2K is just as big a problem for smaller banks. Aubrey Austin, president of Santa Monica Bank, which is in the midst of merging with Western Bancorp of Newport Beach, estimated that the bank would spend more than $1 million on the problem.

The majority of the money being spent on Y2K goes toward hiring programmers. City National Bank alone has 150 programmers dedicated to the problem, said John Beale, an executive vice president.

The first hurdle is to identify problems in existing software, which can take months.

"We are not just having to inspect our mainframe computers, but also all our personal computers and our local area network," said John Haynes, chief financial officer at Glendale Federal.

Once problem software is located, the bank can choose to purchase Y2K-compliant software, or use another computer program to upgrade the system's date-recognition capability. In many cases, that will force the bank to buy more-advanced computers that can handle the new software. Haynes said Glendale Federal plans to spend more than $2 million on PCs alone.

Then comes the exhaustive process of testing the new system to make sure it is not only in Y2K compliance, but that it interfaces properly with the bank's other computer systems and those of its customers. Socha estimated that 50 percent of the costs related to Y2K will go to testing the systems.

Banks are motivated by more than fear of a computer meltdown. The Federal Deposit Insurance Corp. and other regulatory agencies are threatening to close down any financial institution that has not fully addressed the Year 2000 problem.

By the end of 1997, banks were expected to have identified all potential Y2K problems. This year will be used for upgrading or replacing software and hardware, while 1999 will be set aside for testing.

The FDIC would not go into specifics on the progress of individual member banks, saying only that the majority are on schedule. The FDIC, in conjunction with the Federal Reserve Board, in November closed Putnam-Greene Financial Corp. of Eatonton, Ga., with assets of $209 million, due to its lack of progress toward achieving Y2K compliance.

The FDIC says it is confident that most, if not all of its members will have cleaned up their internal systems in time for the year 2000. The greater threat comes from large corporations that are bank customers.

Without the pressure of regulators, much of corporate America is believed to be well behind the curve when it comes to making its computer systems ready for the year 2000.