PHOENIX, AZ
- Comptroller of the Currency John C. Dugan cautioned bankers against easing
underwriting practices and inappropriately lowering loan loss reserves during
today’s speech to the American Bankers Association.
Mr. Dugan shared
results of the interagency Shared National Credit review and the OCC’s 2006
Underwriting Survey. While generally
positive, this year’s SNC review showed a small decline in credit quality that
followed a long period of improvement.
“Even such a small
decline in credit quality, however, is still a decline,” Mr. Dugan said. “We will be monitoring whether this year’s
decline portends a change in direction, or simply a stabilizing of credit
quality of the syndicated loan market.”
The Comptroller’s
concerns about credit risk stem from the OCC’s 2006 Underwriting Survey, now in
its 12th year. The survey
examines 18 different product lines in the 73 largest national banks and is
based on the professional opinions of OCC’s on-site examiners.
“What the Underwriting
Survey says this year should give us pause,” Mr. Dugan said. “Loan standards have now eased for three
consecutive years.” The Comptroller
reported “slippage” in commercial lending involving leverage lending and large
corporate loans as well as in retail lending with significant easing in
residential mortgage lending standards including home equity loans.
“We don’t want to see
lending decisions bankers make today result in excessive foreclosures – and
reduced affordable credit – tomorrow,” he said.
In light of increasing
credit risk, Mr. Dugan emphasized the importance of maintaining today’s strong
loan loss reserves. “Solid loan loss
reserves – representing the best estimate management can make of how much money
the bank will lose on the loans it has made – are critical to a bank’s safety
and soundness,” said the Comptroller.
“That is especially true today, at a time of rising credit risk, easing
underwriting standards, concentrations in some loan products, and a lack of
performance experience with others.”
“In presenting results
such as these, we are always mindful of the need to avoid painting a darker
picture than is warranted,” Mr. Dugan added.
“The challenge we face is managing this risk in an effective and timely
way and doing it now – while credit quality is still good, while loan loss
reserves are strong, and while the economy is robust.”
In addition to credit
risk and loan loss reserves, the Comptroller also stressed the important role
of community bankers within the national bank system today and OCC’s focus on
providing value through its supervision process. Community banks make up 92 percent of the
banks that OCC supervises, involving 65 percent of the agency’s bank
examination force.
Community banks “face
an increasingly complex set of compliance requirements covering anti-money
laundering, fair lending, and consumer disclosures,” Mr. Dugan said. He added that “community banks sometimes need
more guidance to comply with the regulatory maze” and “OCC examiners are
trained and encouraged to provide advice that goes beyond the scope of the
formal examination for those banks who want it.”
The speech is available at http://www.occ.gov/ftp/release/2006-113a.pdf
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The
Office of the Comptroller of the Currency was created by Congress to charter
national banks, to oversee a nationwide system of banking institutions, and to
assure that national banks are safe and sound, competitive and profitable, and
capable of serving the banking needs of their customers in the best possible
manner. OCC press releases and other
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