News Release 2005-95 | September 26, 2005

Comptroller Dugan Tells Bankers that Long Fight to Shed Outdated Laws Promoted Innovation

Palm Desert, CA— Comptroller of the Currency John C. Dugan said in a speech today that both consumers and banks have benefited from the long fight to shed outdated laws and regulations, and he expressed pride in the role he played in those efforts.

"I worked hard throughout my career on the Senate Banking Committee staff, at the Treasury Department, and in private practice to enable banks to compete vigorously to provide consumers with the broad range of financial products and services they demand, wherever they demand it," he said in a speech before the annual convention of the American Bankers Association.

"Who would have thought 15 years ago that banks could offer the full range of banking, securities, insurance, credit card, and mutual fund products to customers in any part of the country?" he added. "And look at the results: by vigorously competing to provide both new and traditional products and services, banks are stronger than ever – record profits; solid balance sheets; and high levels of capital.

"National banks have very often been at the forefront of that innovation, and the OCC has worked hard to keep the national bank charter strong and vibrant to facilitate this innovation," he said. "This is a long, distinguished tradition that I warmly embrace."

Mr. Dugan also recalled the painful lesson of the late 1980s and early 1990s.

"As a young staffer on the Senate Banking Committee, the hearings on the savings and loan disaster, begat by a failure of regulation and supervision that cost the taxpayer well over a $100 billion, are seared in my brain," he said. "Likewise, as a Treasury Department official, I witnessed first hand the commercial real estate convulsion that hit the banking industry with such violence, especially in Texas and New England, but in other parts of the country as well."

The experiences of those years had a lasting effect on his thinking, Mr. Dugan said.

"Let me be clear about my perspective from the experiences of the late 1980s and early 1990s: I’m a safety and soundness guy, and I believe in strong capital," he said "The banking system's comeback from those dark days to its present prosperity must be counted as among the more stunning revivals of our lifetime—and I sure don’t want to go back."

While applauding the bank industry’s health, Mr. Dugan emphasized that the OCC will be watching national banks closely, and the agency will not hesitate to act.

For example, Mr. Dugan cited findings in the OCC's 2005 Underwriting Survey that showed a distinct shift toward easing for commercial credit, most noticeable in residential real estate. While easier availability of first mortgages has helped marginal borrowers obtain loans, Mr. Dugan said that looser underwriting standards and more widespread penetration of riskier mortgage products have raised questions about how these loans will fare in the event of a rise in interest rates of a softening in house prices. As a result, the OCC is currently leading an interagency effort that is expected to result in appropriate guidance this fall.

Mr. Dugan also addressed the potential change to risk-based capital requirements that bank regulators are now considering as part of the Basel II process. The Comptroller said the process was worthwhile and expressed support for it. But he noted that the fourth quantitative impact study (QIS-4) of the Basel II proposal forecast a significant reduction in capital from Basel II across banks and significant variations in capital levels among banks that appear to have similar exposures to risk.

"These troubling results have quite rightly caused the regulators to take a "time out" to better understand the QIS-4 submissions," Mr. Dugan said. "As the OCC has reiterated throughout the process, Basel II implementation efforts must be undertaken in a prudent, reflective manner, consistent with safety and soundness and continued competitive strength of the U.S. banking system."

While the bank regulators continue to discuss the issue, Mr. Dugan made clear the perspective of the OCC. First, there must be a clear plan to address the concerns raised by QIS-4 as we move forward with the implementation of Basel II. Second, the QIS-4 results clearly highlight the value of other measures that backstop risk-based capital, such as the role of the leverage ratio in prompt corrective action.; Third, there must be substantial overlapping comment periods with respect to any proposed rule on Basel II, which applies to the largest banks, and a proposed rule regarding so-called "Basel IA," which is the revised risk-based capital rule that would apply domestically to other banks.

Mr. Dugan addressed the new reporting requirements of the Home Mortgage Disclosure Act (HMDA) and the importance of careful analysis of the new data. However, he pointed out that any final determination of unlawful discrimination could only be made after additional examination, data collection, and analysis relying on advanced quantitative modeling, field investigations, and the combined skills of the agency's team of examiners, Ph.D. economists, and attorneys.

"We will continue to pursue each suspected case of discrimination vigorously and objectively, through the examination process or through legal means, as warranted by the facts—but only by the facts," Mr. Dugan said. "Let’s not ever forget that, just as we never encourage lenders to discriminate unlawfully, we need to be very careful not to discourage them from making credit available to anyone who can afford it."

Addressing the challenge posed by those who would use the banking system to launder money and finance terrorist activity, Mr. Dugan said that through determination, resourcefulness, and vigilance, bankers and regulators can detect and deter illegal activity if banks have reasonable anti-money laundering systems in place and the resolve to make them work.

"My goal is to make BSA a strong, consistent part of our overall supervisory program, and to be as balanced as possible in our supervisory judgments," Mr. Dugan told the bankers. "That does not mean "zero tolerance," and it does not mean eliminating supervisory discretion—but it does mean more effective communication to you of what we expect."

Mr. Dugan concluded his remarks by acknowledging the costs and time for banks to implement regulations, especially for community banks which operate on thin margins and lack the specialized personnel to handle the mounting volume of paperwork, and that it will be one of his priorities to try and alleviate unnecessary burden. He cited the "two-tier" approach in the new CRA regulations that will significantly reduce data collection and reporting requirements as the kind of regulatory relief that makes sense.

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