Comptroller Dugan Tells Senate Industry is Fundamentally Sound, Credit Market Disruptions and Economic Slowdown Test Banks

WASHINGTON—Comptroller of the Currency John C. Dugan told a Senate Committee today that while the banking system is fundamentally sound, it is being tested by large and unprecedented credit market disruptions plus the slowdown in the economy.

"Thus far national banks have been able to address a number of significant problems that have arisen while continuing to supply credit and other banking services to the U.S. economy - although there is no doubt that credit standards have tightened," he said in testimony before the Senate Committee on Banking, Housing and Urban Affairs.

The Comptroller cited the liquidity support a number of large banks provided to asset-backed commercial paper conduits and structured investment vehicles or SIVs - often involving the painful recognition of losses - to restore more normal funding in these markets.

"Likewise, banks with concentrated positions in collateralized debt obligations backed by subprime asset-backed securities have recognized large losses - but have also raised large amounts of capital to offset these and other losses," he said.

However, significant market disruption issues remain to be addressed, such as the potential downgrades of monoline insurance companies; significant funding problems in the auction rate securities market; and severe constriction in the securitization markets for residential mortgage-backed securities, commercial mortgage-backed securities, and leveraged loans, he said.

In addition, the economic slowdown and problems in the housing market have led to significant increases in reserves banks carry for such assets as residential construction and development loans; home equity loans; and credit card loans, Mr. Dugan said. Community banks, with large concentrations in commercial real estate-and there are many of them-face real challenges in those parts of the country where real estate markets have slowed significantly.

"Unlike the unprecedented market disruptions of the last six months, these more traditional credit problems are familiar territory to bankers and supervisors," he said. "The key to addressing them is for bankers to recognize problems early and manage through them, and that is exactly what our examiners are working with them to do."

The Comptroller also said there is a need to reemphasize some fundamental banking principles, including sound underwriting, diversification of funding sources, strong internal controls and risk management, and timely recognition of losses.

"In each of these four areas - asset quality, liquidity, risk management, and reserves and capital - we remain alert to emerging trends and to findings that may trigger additional supervisory action," he said.

The Comptroller also said that current efforts to address foreclosure prevention and mitigation are very important to the OCC, since the nine largest national banks act as servicers for about 40 percent of all U.S. mortgages, including a significant number of subprime mortgages.

Mr. Dugan said the OCC has supported a number of important efforts, including the work of the HOPE NOW alliance, and noted that last week the agency launched a new initiative that would require the largest national banks to report key data on mortgages, including mortgage modifications.

"We are requiring our largest national bank servicers to provide standardized reports on a range of mortgage metrics, not just for subprime adjustable rate mortgages, but for all mortgages," he said. "These data, which are consistent with the HOPE NOW metrics, will provide an important way to track mortgage performance against a broad range of indicators."

Related Links

• Oral Statement (PDF)
• Written Testimony (PDF)
• Comptroller of the Currency John C. Dugan