Comptroller Dugan Tells House Committee that National Banking System Remains Safe and Sound, Challenging Credit Markets

WASHINGTON—Comptroller of the Currency John C. Dugan told a House committee today that despite challenging conditions in mortgage and credit markets, the national banking system remains safe and sound. He emphasized that the OCC is closely monitoring conditions so that the agency can quickly address any problems that might arise.

"Unlike many non-bank lenders, national banks generally have strong levels of capital, stable sources of liquidity, and well diversified lines of business, all of which have allowed them to weather adverse market conditions," he said. "As a result, national banks remain active in major markets and continue to extend credit to corporate and retail customers, including mortgage credit."

While the institutions supervised by the OCC are substantial participants in all aspects of the residential mortgage markets, including subprime lending, Mr. Dugan emphasized that national banks have proportionally been less involved in subprime. They originated less than 10 percent of all subprime mortgages in 2006, and have experienced default rates that are significantly lower than the national average.

In his testimony, Mr. Dugan noted the worst problems that have been observed in the markets – insufficient liquidity resulting in substantial declines in capital and sometimes in failure – have occurred outside the commercial banking sector.

The OCC is the primary supervisor for the very largest commercial banks that play critical roles in virtually all aspects of today's capital markets. Comptroller Dugan noted in his testimony that the OCC maintains teams of examiners on-site at each of these institutions to monitor their activities.

Although recent actions by the Federal Reserve and other central banks to restore liquidity are encouraging, the situation remains fluid and it may take some time before markets fully stabilize, he said. "We are therefore continuing to watch conditions very closely to address issues that may arise," he added.

The Comptroller said that the recent difficulties in the mortgage markets are likely to cause positive changes for market participants, but he expressed concern that many Americans face unmanageable mortgage obligations. Part of the problem in today's credit markets, he said, resulted from underwriting standards that had relaxed too much, partly as a result of investor willingness to assume greater risk in order to achieve higher yields. Today, market participants are demanding changes in the form of more conservatism.

"While legitimate concerns remain about the pendulum swinging too far and too suddenly in the opposite direction, we remain hopeful that markets will stabilize at an equilibrium where lending standards are more rational and pricing more accurately reflects risk," he said in testimony before the House Financial Services Committee.

Those positive changes in the markets will apply to loans made in the future, he said.

"Unfortunately, the same cannot be said for many loans that have already been made – and in particular, for many homeowners holding subprime mortgages," he added. "For those Americans who may be facing unmanageable mortgage obligations, recent events are far more serious than a simple market correction. They may instead result in foreclosure and all its potentially devastating effects on families and communities."

The Comptroller said that the OCC recognizes the need to do all it can to reduce the inevitability of that outcome.

"We have taken concrete steps to encourage both lenders and borrowers to respond to these situations in ways that minimize the likelihood of foreclosure while preserving safety and soundness," he said.

Related Links

• John C. Dugan
• Oral Statement (PDF)
• Written Testimony (PDF)