Comptroller's Viewpoint
Agency History and Profile
Operations and Accomplishments
I am pleased to report that the national banking system not only remained strong throughout fiscal year (FY) 2006, but that both the OCC and the system are well equipped to meet the challenges that lie ahead.
This was the second consecutive year in which no national bank failed. Capital was strong and earnings increased, driven by strong growth in noninterest income. Healthy loan growth helped compensate for narrowing net interest margins. Losses and delinquencies were minimal. In short, the picture at year-end was quite positive.
Yet as supervisors, it is our job to worry about what comes next. Are we at the stage of the credit cycle where risks in the system begin to increase because of less favorable macroeconomic conditions, increased competition, and weaker underwriting standards? What must we be doing to prepare the banking system and the OCC for the challenges ahead?
A great deal of our work during the year focused squarely on these questions. The interagency Shared National Credit review, a detailed assessment of large syndicated loans to major corporate borrowers, provided one important "snapshot" of national trends in credit quality. The review found only small increases in the number of criticized and classified commitments-and those increases were measured against 2005 levels, which were the lowest in six years. As positive as those results were, they did not answer the question of whether that small drop in credit quality portends a change in direction, or merely a small fluctuation around a high and stable level of credit quality in the syndicated loan market.
Of greater concern to me was the evidence of credit trends provided by the OCC's Survey of Credit Underwriting Practices, a detailed review of lending standards across 18 commercial and retail product lines, based on the professional judgment of examiners-in-charge at the 73 largest national banks. The 2006 survey results indicated that loan standards in both commercial and retail lending had eased for a third consecutive year under pressure from competition and optimistic expectations for loan volume, yield, and market share. The evidence included thinner pricing, reduced amortization, weaker covenants and controls, pervasive structural concessions in such terms as tenor and guarantor requirements, and increased exceptions to lending policies.
In commercial lending, the most pronounced slippage occurred in leveraged lending and large corporate loans. Commercial real estate also showed continued signs of net easing that, in combination with the increased concentrations in commercial real estate loans, heightened concerns in that area. In retail lending, there was significant easing in residential mortgage and home equity lending standards: longer interest-only periods, higher allowable debt-to-income and loan-to-value ratios, and greater volumes of loans with reduced documentation requirements. Significantly, this weakening of standards came at a time when prices in the previously red-hot housing market were leveling off and, in many local and regional markets, actually declining. Although these market trends would normally trigger tighter lending standards, all evidence suggested that standards were continuing to loosen because of intensifying competition among lenders for a shrinking pool of buyers.
The evidence emerging from our analysis revealed symptoms that have historically been reliable predictors of future problems in the banking industry, if not addressed. Our challenge was to ensure that national banks managed this risk in an effective and timely way, while credit quality, loan loss reserves, and the economy remain strong.
It was with that objective in mind that the OCC addressed a broad range of risks facing the national banking system during FY 2006.
As the fiscal year drew to a close, the bank, thrift, and credit union regulatory agencies published guidance addressing nontraditional residential mortgages. At a time of rising house prices in many parts of the country, some lenders introduced options that, for a limited period, allow borrowers to forego regular principal payments ("interest-only" loans) or even to waive a portion of the interest due, resulting in negative amortization. Although these products clearly can benefit some consumers, we are concerned that banks may not properly manage the risks they entail, especially in an environment of rising interest rates and softening real estate markets. Our guidance therefore cautions banks to assess a borrower's ability to repay the loan at the fully amortized rate and to ensure that the borrower understands the terms and risks of the product before purchase.
Similar concerns lay behind this year's proposed guidance on commercial real estate (CRE) concentrations. The guidance does not take the position that CRE concentrations are inherently unsafe and unsound, or that hard limits should be set on such activities. Instead, it concludes that CRE concentrations pose special risk that can and must be managed effectively through appropriate management controls, including strong information systems.
Strong capital is a key element of any risk management regime-and the bulwark of a safe and sound banking system. A year marked by significant progress in the arduous process of writing, refining, testing, and critiquing the Basel II capital rules culminated in the long-awaited release of a Notice of Proposed Rulemaking that was issued for public comment. I am committed to continuing to work closely with all concerned parties to ensure that the Basel II capital rule that emerges from this process is one that deserves widespread support.
We undertook lower-profile, but no less important, initiatives throughout the year that further strengthen risk management in the national banking system. Our Community Bank Directors Workshop program offered a selection of one-day classes on such subjects as credit risk, compliance risk, and the OCC's risk assessment process. In February, more than 400 senior bank managers, academics, vendors, and regulators attended an OCC-sponsored conference on risk modeling, reflecting the growing importance of these sophisticated statistical tools in making underwriting decisions, managing and pricing accounts, and mitigating losses.
The banking system played an increasingly important role in safeguarding our nation's physical security. The OCC takes very seriously its responsibility to enforce the Bank Secrecy Act in a manner that is rigorous, consistent, measured, and fair. To help bankers better understand their responsibilities under the law and our supervisory procedures, we continued an ambitious industry outreach program and issued clarifying supervisory guidance. We also added a new director for Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) Compliance and increased the number of BSA/AML experts in our headquarters office, which substantially augmented the OCC's existing expertise in this critical area.
During fiscal year 2006, recovery began in earnest from the massive damage wrought by hurricanes Katrina, Rita, and Wilma on the Gulf Coast. National banks are playing a crucial role in that effort, beginning with the recovery of many local banks from damage sustained during the storms. During my several trips to the region, I was impressed by the way that banks have put competitive considerations aside and worked together to keep vital services flowing to citizens of the affected communities.
OCC staff members did their part, too. They worked with our banks to address the many regulatory issues raised by the storms and encouraged bank officials to work with their customers to help see them through the financial difficulties many of them faced. They also established relationships with community organizations and helped coordinate our outreach efforts to local citizens and governmental bodies. They helped mobilize the financial and intellectual resources of out-of-town bankers, many of whom attended an interagency banker forum held in New Orleans in March-as I did.
The OCC's commitment to community development is an around-the-country proposition. I saw the fruits of the partnerships between national banks and community-based organizations during my visits to neighborhoods in Chicago, Los Angeles, and Washington, D.C., during FY 2006. Small business formation and assistance, housing construction and renovation, financial literacy and foreclosure abatement programs-the range and vitality of community development initiatives undertaken with the support of national banks-are truly impressive.
Several regulatory initiatives during the fiscal year promise to make these partnerships even more successful. For example, we provided guidance on how small- and minority-owned business contracts that enhance the effectiveness of a bank's small business loan program may be considered favorably in the bank's Community Reinvestment Act evaluation. We also proposed that Congress approve legislation increasing the community development lending authority available to national banks under Part 24 of our regulations, and that measure was adopted and signed into law. Under Part 24, national banks may make an investment in a minority-owned bank or thrift. The OCC is committed to supporting these institutions. Our outreach efforts this year resulted in constructive dialogue between minority-bank CEOs and OCC's senior executives, and helped us better understand the special issues they face.
Protecting the rights of bank consumers is one of our agency's fundamental obligations. In FY 2006, we expanded the capabilities of our Customer Assistance Group (CAG), located in Houston. A report this year by the Government Accountability Office (GAO) gave CAG high marks for the way information obtained from consumers is incorporated in the examination process. The GAO report also contained suggestions for improving the quality of service CAG provides to consumers-suggestions that we are in the process of implementing.
The national bank charter continued to be a vibrant vehicle for conducting the business of banking. This is reflected in the growth of the national banking system: assets under OCC supervision grew from $5.9 trillion to $6.5 trillion during the fiscal year, representing 67 percent of all U.S. commercial bank assets.
In a long-awaited decision, Wachovia v. Schmidt, the U.S. Supreme Court unanimously upheld the OCC's position that a national bank is a citizen of the one state in which its main office is located. This seemingly arcane issue is one of significant practical importance because it enhances the ability of national banks to have their cases heard in federal courts.
Important legal principles affecting national banks continue to be litigated, including the extent to which state laws are preempted by federal law under the National Bank Act, and the scope of the OCC's exclusive "visitorial" authority over national banks (the authority to examine, supervise, regulate, and sanction national banks). One issue, the question of whether state laws apply to national banks' operating subsidiaries to the same extent as they apply to the parent bank itself, will be considered by the Supreme Court in late 2006, and should be decided in 2007. This case, Watters v. Wachovia Bank, N.A., arose from state efforts to regulate and require state licenses of mortgage banking operating subsidiaries of several large national banks. The OCC believes that if state law is inapplicable to a national bank because of federal preemption, the state law also would be inapplicable to the bank's operating subsidiary because the operating subsidiary is a federally authorized means through which the bank exercises its federally authorized powers.
Information security, long a focus of attention for the OCC, emerged as a critical issue during the year, as security breaches at some government agencies, including the loss of laptop computers, raised the visibility of this problem. A break-in at the OCC's Phoenix office exposed vulnerabilities even where security is high. In response to these developments, the OCC launched an end-to-end security review from which we expect to emerge with a strengthened security infrastructure fully capable of confronting the world of network linkages, high-speed transmission, and mass storage of easily portable electronic data that our supervisory work requires.
I have said to OCC staff that it is my responsibility to make sure that on my last day in office, the OCC is stronger than it was on my first. To achieve that goal, we must build staff resources and expertise that are equal to the growth in the size and complexity of the national banks we supervise. Our success depends on the supervisory staff that implements OCC policies: nearly 3,000 examiners, attorneys, economists, information technology experts, and other professionals and support staff. Directly or indirectly, they are responsible for the examination and supervision of the more than 1,800 national banks, federal branches of foreign banks, and uninsured national trust companies. Our front-line examiners serve as the OCC's face to the banking industry.
During the last year, we have focused intently on our organizational and human resource capabilities and requirements. The challenge we face is embedded in the OCC's changing demographics: fully 30 percent of our current employees and 50 percent of our managers will be eligible to retire in the next five years. Recruitment, retention, and training are thus essential to the future of our organization and our ability to perform our important mission.
During the last year, we have made unprecedented strides in recruitment and hiring of examination staff, bringing aboard 162 new college hires and 37 mid-career hires from industry and other agencies. We have also made great strides in assessing the agency's skill requirements and laying plans for the training programs needed to meet them. This is an advantageous moment to be tackling these challenges. The current sound condition of the national banking system allows us to focus on our personnel needs in a measured and orderly way. We are also well positioned by the OCC's own financial health, which is discussed elsewhere in this Annual Report, and our growing reputation as a workplace of excellence.
The OCC placed sixth among more than 170 peer agencies and bureaus in a survey of "The Best Places to Work in the Federal Government." Also, BusinessWeek magazine named us among the 50 best places in America to start a career. These results are not only a matter of organizational pride, but also an asset of considerable value to us as we work to recruit and retain the best qualified individuals to fill our evolving personnel needs.
We are living in a time of great uncertainty and constant change, but I am confident that we are prepared to evolve with the market, meet new challenges, and respond to emergencies-just as the OCC has done throughout its 143-year history.
[signed]
John C. Dugan
Comptroller of the Currency
October 2006
President Abraham Lincoln established the Office of the Comptroller of the Currency (OCC) by signing the National Currency Act of 1863, which empowered the fledgling bureau to organize a system of nationally chartered banks and administer a uniform national currency that generated badly needed revenue during the Civil War.
The currency-related duties of the OCC, a bureau of the Department of the Treasury, ended after the Banking Act of 1935 retired national bank currency in favor of Federal Reserve notes, but the agency continues to supervise, regulate, and charter national banks.
Much has changed during the OCC's history. Examiners once painstakingly counted all of a bank's cash during an examination and faithfully recorded each national bank's "resources" and liabilities in the annual Report of the Comptroller of the Currency. In later years, examiners encoded telegraph messages to headquarters using a pocket-sized "Cipher Code" book for reference.
What has not changed during the past 143 years is the OCC's steadfast dedication to ensuring a safe, sound, and fair national banking system for all Americans.
Today, the OCC supervises more than 1,750 national banks, more than 80 uninsured national trust companies, and 49 federal branches of foreign banks in the United States.
National banks represent only about a quarter of the commercial banks nationwide, but they hold about two-thirds-$6.4 trillion-of the nation's total commercial banking assets. Including federal branches and uninsured national trust companies, total assets under OCC supervision are nearly $6.5 trillion.
The OCC has nearly 3,000 employees, including almost 2,000 bank examiners.
John C. Dugan is the 29th Comptroller of the Currency and the chief officer of the OCC. An 11-member Executive Committee, comprised of senior agency officials who lead major business units, advises the Comptroller.
The OCC operates entirely free of taxpayer dollars. Semiannual assessments on national banks account for about 97 percent of the OCC's operating budget. The agency also receives interest income from investments in U.S. Treasury securities, licensing fees, and other fees.
The agency is headquartered in Washington, D.C., and maintains a number of offices throughout the country, including a data center in Maryland, an Office of the Ombudsman in Houston, and district offices in Chicago, Dallas, Denver, and New York City. The agency also has 52 field offices and 25 satellite locations that give it a full-time presence in two-thirds of the states, as well as examiner teams that are resident full-time in the 22 largest national banks. An office in London facilitates the supervision of international activities of national banks.
The Office of the Comptroller of the Currency supervises institutions representing 67 percent of the nation's banking assets, ranging from small agricultural banks in the farm belt to the largest banks in the world-including some with more than a trillion dollars in assets.
Large bank supervision is accomplished in part through teams of experienced examiners assigned full-time to individual institutions. They are supported by all of the resources a national regulator can bring to the task, including a strong legal staff and experts in a variety of risk areas, such as capital markets, bank technology, credit risk, and compliance. In addition, Ph.D. economists-the OCC's "quants"- work with national bank examiners to evaluate the complex models banks use to manage risk.
Community institutions, the economic backbone of America's communities, represent by far the largest number of banks supervised by the OCC. The OCC has a network of field offices that examine these smaller banks in every state in the country. Each field office oversees a portfolio of banks, and the examiners are frequently on the road, traveling from bank to bank for examinations.
In between are mid-size national banks that have outgrown the community bank category and share some attributes with large banks. This bank segment draws examiners from Large Bank Supervision as well as the ranks of community bank examiners. Mid-size banks are key training grounds for examiners who typically start their careers in community banks, then can move into specialized fields in large banks as their expertise grows.
In addition, the OCC supervises credit card banks, uninsured national trust companies, and federal branches of foreign banks.
The national banking industry is diverse, competitive, and constantly changing, requiring the OCC to evolve with the industry. The keys to the OCC's success as a banking regulator are the dedicated and highly skilled professionals who work for the agency. To ensure that the agency has the skills to keep pace with an evolving industry and to ensure continued strong leadership as the baby boom generation reaches retirement, the OCC has made top priorities of staff recruitment, retention, training, and the development of a new generation of leaders.
The OCC pursues four strategic goals to achieve its mission:
Here are the major operations of the OCC and the most significant accomplishments that the agency has achieved under each of the four strategic goals during FY 2006.
The OCC examines banks to ensure that each national bank operates in a safe and sound manner and complies with applicable laws, rules, and regulations. The agency also analyzes and monitors systemic risk and market trends in the national banking system, the financial services industry, and the economic and regulatory environments.
The agency continuously supervises six categories of institutions-large banks, mid-size banks, community banks, credit card banks, uninsured national trust companies, and federal branches of foreign banks-and develops supervisory strategies based on each bank's risk profile and condition. Each strategy outlines the examinations and off-site analyses that will be completed during the supervisory cycle. To carry out this objective, the OCC employs nearly 2,000 bank examiners, based in offices throughout the United States.
In FY 2006, the OCC's supervisory strategies focused on Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance, credit quality, risk management practices, audit, internal controls, integrity of financial statements, reliance on noninterest income, and other areas. Supervision also concentrated on outsourcing and vendor activities; interest rate risk models and controls; liquidity and investment portfolio practices and holdings; concentration risk; Basel II implementation; allowance for loan and lease losses methodology and adequacy; and corporate governance. Many of these issues will continue to be areas of emphasis in FY 2007 strategies.
OCC's National Risk Committee regularly briefs the Comptroller and the Executive Committee on material and emerging risks facing the national banking system, evolving business practices, and financial market issues. Risk assessment and strategies to mitigate identified risks are significant areas of focus for Executive Committee members.
When necessary, the OCC employs a range of enforcement options to help national banks correct identified problems. These options range from advice to informal and formal enforcement actions. Agency officials determine the best course of action in each particular case based on the facts of that case and reasoned judgment about how to address problems most effectively. Informal enforcement actions include commitment letters and memorandums of understanding, which often are effective in correcting problems. At the next level, formal enforcement actions include specific, formal agreements signed by a bank's board of directors and the OCC. Cease-and-desist orders are similar to formal agreements and may be enforced through assessment of civil money penalties. Cease-and-desist orders may also be enforced by a request in federal district court for injunctive relief.
During FY 2006, the OCC issued the following supervisory guidance, policies, and examination handbooks on issues and risks affecting national banks:
Bank capital serves as a buffer against anticipated and unexpected losses. Risk-based capital standards are designed so that if banks take on greater risk, they must hold more capital. The current risk-based capital framework, implemented in 1989, relies on a very crude distinction between risks. The OCC is working with the FRB, FDIC, and OTS to ensure that regulatory capital requirements better reflect the risks facing the banking industry.
The agencies' capital reform efforts for the largest and most complex banks are focused on the U.S. implementation of the Basel Committee on Banking Supervision's revised capital accord, known as Basel II. The Basel II framework is designed to provide a more risk-sensitive capital process that incorporates information from advanced risk management and measurement systems used by large banks. In September, the agencies issued for comment the interagency notice of proposed rulemaking to implement Basel II, an interagency notice of proposed rulemaking on changes to the risk-based capital standards for market risk, and proposed supervisory reporting templates to collect key data required under the proposed Basel II framework and revised market risk standards. The agencies also continued to work on supervisory guidance that outlines those portions of the risk measurement and management systems that banks subject to the Basel II framework would need to meet.
The Basel II framework is not appropriate for all banks in the United States. Many of those banks need meaningful, but simpler, improvements in their risk-based capital requirements to align capital more closely with risk. To address this need, the agencies issued an advance notice of proposed rulemaking in October 2005 that sought comment on possible changes to improve the agencies' current capital rules for non-Basel II banks. The agencies have reviewed those comments and are proposing modifications to their rules. Publication of the proposed rule, known as Basel 1A, is anticipated in early 2007. Bank Secrecy Act/Anti-Money Laundering
Early in FY 2006, the OCC launched a comprehensive set of initiatives to ensure that its BSA/AML supervision is not only effective, but also measured and fair. "The post-9/11 world is profoundly different in many ways from what it used to be, and that is certainly true in the BSA area," Comptroller Dugan said in a speech in November 2005. "Whether we like it or not, the traditional concerns of BSA-disrupting the money flow of the drug trade and other illicit activity-have been joined with concerns about combating the financing of terrorism."
Highlights include:
OCC is committed to ensuring that banks have adequate and effective BSA/AML programs in place. The agency is also committed to balanced supervisory discretion by taking supervisory actions fairly and consistently.
The OCC investigates national banks that fail to meet BSA/AML requirements and brings enforcement actions against them. Banks must implement adequate BSA compliance programs in accordance with OCC regulations, establish procedures to identify and monitor high-risk accounts, and report suspicious transactions. The OCC coordinates with other regulators and law enforcement authorities to ensure such compliance and detect, track, and prevent attempts by terrorists and other criminals to use the national banking system for their activities.
The OCC brought enforcement actions against several banks for inadequate BSA/AML compliance programs, ordering them to develop and implement internal controls, conduct audits, designate BSA compliance officers, and conduct employee training programs. For example:
In addition to BSA/AML enforcement, the OCC takes other formal and informal enforcement actions to support prompt detection and mitigation of problems before they affect a bank's viability, and to ensure orderly resolution of troubled banks. These actions address violations of laws, rules, and regulations, unsafe or unsound banking practices, and noncompliance with policies or procedures by national banks, their insiders, and other affiliated parties.
During FY 2006, formal enforcement actions included temporary cease-and-desist orders, final cease-and-desist orders, removal or prohibition orders, CMPs, and formal agreements. The agency also took informal actions, including supervisory letters, memorandums of understanding, and letters of reprimand. In addition, the OCC's Fast Track Enforcement Program helped ensure that bank insiders and employees who committed criminal acts involving banks, but who were not being criminally prosecuted, were banned from working in the banking system. Table 1 summarizes enforcement actions taken in FY 2006.
The OCC brought these actions to detect and mitigate problems at banks that could affect their viability. The agency also took action against bank insiders and other institution-affiliated parties when practices, conduct, or breaches caused, or could have caused, harm to a bank, or resulted in financial gain or other benefit for the insider.
| Table 1: Enforcement Actions, FY 2006 | ||
|---|---|---|
| Type of enforcement action | FY 2006 | |
| Against banks | Against institution-affiliated parties | |
| Cease-and-desist orders | 13 | 9 |
| Temporary cease-and-desist orders | 2 | 0 |
| 12 USC 1818 civil money penalties | 6 | 41 |
| 12 USC 1818 civil money penalties amount assessed | $9,495,000 | $693,500 |
| Flood insurance civil money penalties | 6 | 0 |
| Flood insurance civil money penalties amount assessed | $32,900 | 0 |
| Restitution orders | 1 | 12 |
| Amount of restitution ordered | $6,800,000 | $545,604 |
| Formal agreements | 27 | 0 |
| Memorandums of understanding | 16 | 0 |
| Commitment letters | 7 | 0 |
| Suspension orders | 0 | 0 |
| Letters of reprimand | 0 | 41 |
| 12 USC 1818 removal/prohibition orders | 0 | 42 |
| 12 USC 1829 prohibitions | 0 | 232 |
| Total enforcement actions | 78 | 377 |
A mortgage lending subsidiary of a national bank engaged in a pattern of submitting loans to the U.S. Department of Housing and Urban Development (HUD) for Federal Housing Administration insurance without proper review and certification by appropriate underwriters, as required by HUD. The subsidiary agreed to pay approximately $6.8 million to HUD in restitution, agreed not to submit insurance claims on certain FHA loans, and was assessed a $6.25 million CMP.
The U.S. District Court for the Northern District of Texas ruled in favor of the OCC in a case involving enforcement of an OCC subpoena challenged under the Right to Financial Privacy Act (RFPA). The court found that the OCC's investigation of the plaintiff (a bank officer) for nonpayment of wire transfer fees was conducted pursuant to the OCC's statutory authority and necessarily qualified as a "legitimate law enforcement inquiry" for RFPA purposes. The OCC was thereby allowed access to the bank officer's personal financial records held at a non-national bank, the court said. The court rejected the bank officer's argument that the OCC must cite a specific violation of law to comply with RFPA requirements. Abrams v. OCC, No. 3:05-CV-2242-L (N.D. Tex. August 3, 2006)
The OCC continued to review the compliance of national banks with federal regulations requiring flood insurance for certain properties located in special flood hazard areas that secure loans by national banks. The OCC assessed CMPs totaling $32,900 against six banks for violating flood insurance requirements in FY 2006.
At 3:00 a.m. on the morning before Hurricane Katrina made landfall along the Louisiana and Mississippi coasts, a local bank executive sent an e-mail to his examiner-in-charge. He and his employees were "up to our ears in alligators," he said, and they had begun executing contingency plans. The region had been through hurricanes before, but this one was going to be different.
The unprecedented magnitude and duration of Hurricane Katrina caused major losses that exceeded the scope of disaster response plans. A second hit from Hurricane Rita three weeks later created an unimaginable situation for area banks, examination teams, and their families.
Many banks had to evacuate twice and execute two separate contingency plans. More than 600 employees of Whitney Bank evacuated from New Orleans to Houston only to move again to avoid Rita's wrath. Hibernia Bank, now part of Capital One, evacuated more than 1,400 employees. OCC employees and their families also fled. Many lost much; some lost everything.
In the days and months after the storms, the financial industry and its regulators showed strength and resilience. Alongside bankers and other federal regulators, OCC employees supported citizens, communities, and banks throughout the region.
"I'm very proud of the way our banks and our team members reacted," Comptroller of the Currency John C. Dugan said. "OCC and the other federal and state bank regulators have often been held up as examples of government at its best."
As chairman of the FFIEC, a group of federal banking regulators, the Comptroller played a central role in shaping interagency responses to the disaster.
Although realistic and well-rehearsed plans for recovery and continuity can help organizations to manage crises, Katrina showed that institutions must improvise, adapt, and overcome obstacles as events unfold. After Katrina, financial institutions adapted procedures to facilitate check cashing for non-customers, shared limited workspace, and worked cooperatively in new ways to meet customer and community needs.
Immediately after the storm, the OCC publicly encouraged national banks to consider helping affected customers by giving them extra time to make loan payments, restructuring their debts, and easing credit terms for new loans.
OCC examiners also acted as facilitators between their banks and other federal agencies. For example, when the flow of mail slowed to a trickle after the storms, the OCC set up meetings between bankers and representatives of the U.S. Postal Service. Over the weeks, the decline in calls to federal regulators signaled progress.
As banks began to reopen offices and resume operations, reconstituting bank staffs presented significant challenges. In response to these challenges, banks moved their back-office operations out of storm-damaged areas, changed operating hours to accommodate employees who were putting their lives back together, and offered pay increases to entice new employees, as well as encourage former employees to return. In one large bank, 90 percent of the loan processing staff had not come back to work a year after the storms. While some employees could return sooner than others, commutes were difficult for months. Re-establishing communication with customers also presented a significant challenge. More than a million people from the Gulf Coast were displaced and spread across the nation, making it nearly impossible for lenders to locate many customers. While regulators encouraged lenders to work with storm victims, lenders could not assess or meet customers' needs without direct contact.
To help solve this problem, the FFIEC sponsored a public service advertising campaign reaching out to encourage hurricane victims to contact their lenders. The radio and print spots began in mid-January and reached an audience of more than 4.7 million people in fewer than 90 days.
The FFIEC later collected valuable hurricane-related lessons from regulators and industry professionals, and documented them in "Lessons Learned from Katrina: Preparing Your Institution for a Catastrophic Event."
The OCC also responded to the needs of its employees and their families who were directly affected by the storm. Like other hurricane victims, OCC families were uprooted by the storms, their homes and lifestyles destroyed. The agency immediately put employees displaced by the storm on travel status, providing them with lodging, a daily stipend, access to cash advances, and other benefits. On a personal level, employees took up collections and made donations to support one another.
The agency explored and authorized alternative work arrangements to help employees return to work from new locations. The OCC also provided equipment, such as wireless handheld devices and laptop computers, to help displaced employees reconnect.
"Getting back to work was important to all of us, so we could return to some semblance of normalcy," said Mary Reeves, an OCC national bank examiner displaced by the storms. "I'll never forget what the agency did for us: 'Whatever you need,' they said."
A year after Katrina, rebuilding the Gulf Coast has only begun. Banks and other financial institutions play critical roles in that effort. Early in the process, Comptroller Dugan took a direct and personal interest in coordinating activities to support the region.
"Nothing can prepare you for a drive that takes you past mile after mile of uprooted trees, abandoned cars, and concrete foundations that mark the spots where homes once stood," the Comptroller said after his first visit to the region. "It is clear that we have a long road ahead before the region returns to normal, but however great the task, the OCC staff and national bankers I spoke to are ready to play their part."
As FFIEC chairman, Comptroller Dugan immediately called for a special interagency working group to coordinate and monitor activities supporting the region. This coordination helped the FFIEC provide broad and flexible guidance giving financial institutions more leeway to meet the needs of their communities.
In October 2005, regulators announced exceptions to regulatory requirements for appraisals in areas affected by hurricanes Katrina and Rita. Waiving the requirements for appraisals allowed speedier granting of loans for recovery from the disasters. In that same month, the OCC announced a partnership with Operation HOPE, Inc., to provide bank customers with information about accounts, lost financial records, ATM cards, direct deposits, how to contact a national bank branch, and other matters.
In December 2005, the agency expanded its presence by establishing an additional OCC Community Affairs Officer in the region to work with national banks, community groups, government organizations, and others who are rebuilding the area.
The federal agencies issued guidance in February 2006 to allow financial institutions to receive Community Reinvestment Act credit for activities that revitalize and stabilize designated disaster areas even though the lender may be based outside that area. The guidance also stated that national banks could receive positive consideration for activities benefiting people who had been displaced by the hurricanes and perhaps had relocated to other states.
In March 2006, regulators hosted a forum, "The Future of Banking on the Gulf Coast: Helping Banks and Thrifts Rebuild Communities." This forum brought community groups, the federal regulatory agency leaders, and lenders together to discuss the challenges facing communities, banks, and thrifts operating in areas affected by the hurricanes. OCC examiners in New Orleans reported additional signs of progress this past summer. On August 7, the Capital One building began operating without any external generator power. From the air, observers could see that the blue dots of tarped roofs were slowly disappearing. Shops were opening on streets that were once underwater, and the first "Lucky Dog" hot dog carts returned to Jackson Square.
Hurricane Katrina was only one of the natural disasters that hit the country in 2005. Its scope and impact tested the resolve of federal regulators and the financial services industry. OCC employees and bankers passed that test and showed their mettle, finding creative and meaningful ways to meet customers' needs as they restored financial services in the flood-torn region. (end of sidebar)
Here are some of the ways the OCC analyzes national bank performance and responds to bank inquiries and appeals of agency decisions and actions.
Bank regulatory agencies use a composite rating known as CAMELS (Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk) to determine the overall condition of banks. The rating, which provides a framework for evaluating significant financial, operational and compliance factors, has a scale of 1 through 5, in which 1 is best. CAMELS ratings are assigned at the completion of every supervisory cycle or when a significant event leads to a change in CAMELS components. In FY 2006, 95 percent of national banks received a CAMELS rating of either 1 or 2, showing the overall strength of the national banking system and the U.S. economy.
Although problem banks sometimes reach a point beyond which rehabilitation is no longer feasible, OCC's early identification of, and intervention with, problem banks can lead to their successful rehabilitation. The OCC proposes corrective actions to improve operations at problem banks. As a result, 46 percent of banks with composite CAMELS ratings of 3, 4, or 5 in FY 2005 improved their ratings to either 1 or 2 in FY 2006. This is an improvement from 44 percent in FY 2005 and 40 percent in FY 2004.
| Table 2: Performance Measures, FY 2006 | ||
|---|---|---|
| Performance Measures | Target | Actual |
| Percentage of national banks with composite CAMELS rating of 1 or 2 | 90% | 95% |
| Rehabilitated problem national banks as a percentage of the problem national banks in FY 2005 | 40% | 46% |
| Percentage of national banks that are categorized as well capitalized | 95% | 99% |
The Shared National Credit (SNC) program is a collaborative review and assessment by the OCC, FRB, FDIC, and OTS of the largest and most complex loans that are shared by multiple financial institutions. The 2006 SNC review, which covered 7,009 loan facilities with commitments totaling $1.9 trillion, found that overall SNC credit quality was good. But the review noted a small increase in the level of adversely rated credits. The bulk of this increase was associated with credits held by nonbank entities, while problem loans at regulated institutions-most notably those with insured deposits-grew slightly. The review also found a continued easing of credit underwriting standards in the syndicated market in general, particularly in non-investment-grade, or leveraged-credit, facilities.
In FY 2006, the OCC assumed the lead of an interagency modernization initiative to standardize and expand the data collection process to improve the effectiveness of reviews. The initiative will continue in FY 2007.
The Federal Deposit Insurance Act classifies insured depository institutions into five categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) based on their capital levels relative to their risks. At the fiscal year-end, 99 percent of national banks were categorized as well capitalized. National banks' capital has remained at this high level for the past several years.
The national bank appeals process is an avenue for the OCC and national banks to address disagreements arising from the supervisory process that cannot be resolved through informal discussions. National banks may appeal OCC decisions and actions to the Office of the Ombudsman. With the consent of the Comptroller, the Ombudsman can stay a pending decision or action until the appeal is resolved. In FY 2006, the Ombudsman's office received about 90 substantive appeal-related inquiries, informal appeals, and formal appeals. Separate from the appeals process, banks may provide confidential feedback at the end of each supervisory cycle on the OCC supervisory process by completing an examination questionnaire administered by the Ombudsman's office.
An explosion of computing power is making a major impact on banking by putting abstract economic models onto personal computers and into banks of all sizes.
Computer modeling to perform complex risk analysis has grown rapidly from small beginnings a dozen years ago to a central role in the national banking system.
Even smaller banks are now using computer models to manage areas of business, such as loan underwriting, credit risk, and asset-liability management. In large banks, the modeling that began in derivatives eventually spread to all lines of business.
To gauge the effectiveness of increasingly pervasive modeling, the OCC employs quantitative modeling experts, who work with members of examination teams in large banks.
What began as a two-person shop in 1994 has grown into a 30-person Risk Analysis Division (RAD), working hand-in-glove with examiners to assess the safety and soundness of national banks' quality controls for computer risk analysis modeling and to assess national banks' fair lending performance.
These experts not only help examiners evaluate the modeling activities of banks, but offer expert advice on best practices in quantitative modeling. The OCC modeling experts have also been busy assessing the quantitative risk systems that would provide inputs for banks to use under the proposed Basel II capital rule.
The agency has sponsored two conferences on computer modeling. The first, on how to build credit rating-and-scoring models, featured experts from the industry and the OCC.
At a follow-up conference in February 2006, OCC experts provided guidance on how to validate those models and develop quality controls to make sure they work as intended. Interest in the conference ran high and organizers had to limit the number of attendees to 400.
"If a bank relies on models in ways that are integral to its business processes, then the soundness of the organization is likely to depend on the validity of those models," Comptroller Dugan told the audience of bankers and officials of other regulatory agencies during the conference luncheon speech. "Models and validation become integral to the way we supervise the bank, making model validation very much our concern. The more central the uses of models are to a bank's business, the more central this aspect becomes to our assessment of that bank's soundness."
Although the OCC has supervised federally chartered banks since the creation of the national banking system more than 140 years ago, its supervision is anything but old-fashioned. The RAD team is only one example of how the world-class expertise of the OCC workforce positions the agency well for its next century of challenges. (end of sidebar)
The OCC maintains ties to other financial regulators and the banking industry.
Industry outreach programs are key vehicles for the Comptroller and other senior OCC officials to exchange information with bank executives and trade association representatives. The Comptroller is a frequent speaker at major industry conferences and events.
The OCC offers programs and conferences to provide information to bankers and bank directors on emerging issues and regulatory requirements. Periodic seminars are offered on the Web and by telephone so bankers can hear agency experts discuss their experiences and regulatory expectations, and can directly ask the experts questions.
The OCC, other federal banking agencies, FinCEN, and OFAC hosted four well-attended conference calls for examiners and bankers about the revised FFIEC BSA/AML Examination Manual. More than 10,000 callers listened and participated in an extensive question-and-answer session.
Another 2006 highlight was a program covering "The New CRA Perspective for You and Your Bank." Approximately 2,000 listeners participated from more than 400 sites.
The OCC sponsors programs each year to foster dialogue between the Comptroller and groups of chief executive officers of national banks. Discussion focuses on the nuts and bolts of OCC supervision, economic and community development trends, and broad issues of public policy. In 2006, the agency hosted about 240 CEOs at programs in Tampa, Dallas, Chicago, Los Angeles, and New York City.
The OCC also conducted 15 workshops for about 750 community bank directors that addressed topics such as credit risk, compliance risk, and the OCC's risk assessment process.
The dynamic and global nature of today's financial services industry presents issues that cut across regulatory and legal boundaries. Banks, securities, and insurance firms participate actively in the credit and capital markets and are often counterparties to each other's transactions; electronic payment systems span the globe; and national banks have offices and customers in countries throughout the world.
Primarily through the FFIEC, the OCC works with the other federal financial agencies (FRB, FDIC, OTS, and NCUA) to coordinate supervisory policies, regulations, regulatory reporting requirements, and examiner training. The agencies also coordinate to supervise institutions that are subject to multiple regulators and perform joint examinations when necessary. Joint supervisory programs include the FFIEC's examination program for multi-regional data processing servicers and the SNC program.
The OCC also works with the SEC on issues such as securities, brokerage, accounting, and disclosure, and with the Federal Trade Commission (FTC) on consumer protection and privacy. In particular the OCC worked with the SEC in developing its "Reg B" rule to define when bank securities activities will be regulated as brokerage. The OCC has agreements with 49 state insurance departments and the District of Columbia to share information about insurance-related supervision and consumer complaints.
The OCC is a member of the administration's Financial and Banking Infrastructure Information Committee (FBIIC) and works with FBIIC, the Department of Homeland Security, and other agencies to combat money laundering and terrorist financing, and to prepare the nation's financial sector for catastrophic events.
The OCC is a member of the National Interagency Bank Fraud Working Group and the Bank Secrecy Act Advisory Group to combat fraud and money laundering in the financial services industry. These groups include representatives of the Department of Justice, the FBI, other law enforcement agencies, the Treasury Department, FinCEN, and the federal banking agencies.
The globalization of the financial marketplace has accentuated the need for OCC to work with financial supervisors around the world. This coordination takes place through formal supervisory groups, such as the Basel Committee on Banking Supervision, the Financial Action Task Force, and the Joint Forum of banking, securities, and insurance regulators. It also occurs through direct meetings and agreements with foreign bank regulators. In addition, the OCC provides technical assistance and classroom training for foreign supervisors across the globe to strengthen their domestic supervisory programs.
As noted throughout this report, the OCC continued to work with other regulators during the fiscal year to respond to emerging risks and issues facing the industry.
In Cairo, OCC officials joined bankers and bank supervisors from North Africa and the Middle East to discuss anti-money laundering issues. In Washington, Russian bank supervisors met with OCC officials about recruiting, commissioning, and retaining bank examiners.
In Turkey, OCC officials met with Turkish supervisors to establish a program for Turkish examiners to attend OCC conferences to enhance their skills and strengthen the collaborative relationship on banking supervisory and analytical issues. Banking is becoming an increasingly global enterprise, especially for the largest national banks, and as banking has become more international, so has the OCC.
"The increasing global integration of economic and financial markets and ever-expanding breadth and complexity of operations of banks heighten the importance of regular and effective communication with our international counterparts," said Nancy Wentzler, Deputy Comptroller for Global Banking.
OCC has developed excellent relationships over the years with many international bank supervisors. For example, the OCC has a valuable working relationship with the China Banking Regulatory Commission, sharing analytical tools, early warning techniques, supervisory procedures for complex products, methods to assess and provide better incentives for management and corporate governance, techniques for improved data structure and management, and programs for general employee training and performance evaluation.
The OCC also collaborates regularly with the Reserve Bank of India to exchange ideas and supervisory information. More recently, the OCC actively participated in shaping the annual banking supervisory program for the South East Asian Central Banks (SEACEN) and held seminars on stress testing techniques for this group and for bank supervisors in Latin America.
Under the agency's Foreign Technical Assistance program, the OCC establishes, builds, and maintains relationships with foreign supervisory organizations to improve bank supervision around the world.
The program increases the international expertise of OCC employees, provides a platform for OCC to present its supervisory philosophy and views to the international supervisory community, and enhances the global reputation of the agency.
"We have a good reputation around the world for supervising banks," noted Jeffrey A. Brown, Senior Deputy Comptroller for International and Economic Affairs.
In FY 2006, OCC examiners taught one-week schools in Egypt on problem bank supervision; in Colombia, Kuwait, and Egypt on evaluating bank management; in Turkey on credit risk management; and in Malaysia on economic stress testing.
The OCC also hosted interns last year from Japan, Korea, Singapore, and China. Turkey and Lebanon each sent a small team to join OCC examiners on bank examinations.
The Foreign Technical Assistance program is just one example of the OCC's participation in the international financial arena.
OCC officials also meet with foreign supervisors about bank activities in foreign countries or other issues of supervisory concern. In 2006, OCC officials met with banking supervisors from India, China, Brazil, Russia, and Canada to discuss anti-money laundering, Basel II capital requirements, regulatory changes, and other issues.
These international exchanges help OCC officials measure the "country risks" that internationally active national banks encounter doing business overseas.
International collaboration on the Basel II capital accord has provided an important forum for banking supervisors from across the world to interact, exchange information about common issues, lay groundwork for information-sharing agreements, and set principles for cross-border supervision.
These information exchanges are also more important than ever to combat the global threat from terrorism by blocking the country-to-country flow of financing for terrorist enterprises. A bank can no longer be sure of avoiding supervisory scrutiny by moving assets from one nation to another.
As the banking world shrinks and international contacts among banking supervisors become commonplace, banking regulation around the globe is trending toward greater similarity. For example, supervisory authorities around the world are following the lead of U.S. bank regulators by increasingly emphasizing supervision-by-risk policies and procedures.
Although the U.S. national banking industry is enjoying excellent health, the Comptroller likes to point out that the OCC's job is to "see around corners," to look beyond the good times for signs of trouble and spot problems early before they can grow. As OCC officials develop and refine contingency plans for the possibility of a confluence of downward economic trends, they must now look not only in this country, but also beyond U.S. shores to a global system of banking. (end of sidebar)
The OCC has a fundamental responsibility to ensure compliance with fair lending laws, the Community Reinvestment Act, and other consumer laws and regulations.
The OCC also strongly supports the community development efforts of national banks. Recognizing the importance of bank investment in America's communities, the Comptroller successfully urged Congress to increase the authority of banks and thrifts to invest in projects that provide housing, community services, and jobs for low- and moderate-income communities and families across the nation.
The Comptroller pressed for adoption of this provision in meetings with lawmakers, banker groups, and community organizations. He also visited community development projects to draw attention to the benefits of the program. These investments have a solid record of profitability and have fostered $16 billion in such investments by national banks in all 50 states in the last decade.
The agency publishes periodic Community Development Insights papers on products, services, and initiatives related to community development and consumer banking.
The OCC continued its work with the other federal banking agencies in FY 2006 to improve privacy notices that banks are required to send to their customers. Simple, easy-to-understand language-not tangled legalese in fine print-is the goal. In March, the agencies released "Evolution of a Prototype Financial Privacy Notice," a report summarizing research on making these notices easier for consumers to understand. The agencies have also commissioned the use of focus groups and one-on-one interviews with consumers to test samples of such notices.
During FY 2006, the OCC and other federal banking agencies not only issued examination procedures for assessing how banks complied with 2005 revisions to Community Reinvestment Act regulations, but also:
Federal banking agencies joined HUD in releasing updated answers to questions regarding 2005 home loan data to be disclosed under the Home Mortgage Disclosure Act. The OCC also updated its consumer compliance booklet, "Fair Lending Examination Procedures."
Identity theft and the accuracy of consumer information reported to, and used by, credit bureaus also were major concerns to consumers, bankers, and regulators. In July 2006, the OCC, other FFIEC-member agencies, and the FTC issued proposed rules to require financial institutions and creditors to develop and implement identity theft prevention programs. The proposal included guidelines about patterns, practices, and activities that signal risks of identity theft. The agencies also published for comment proposed procedures to enhance the accuracy and integrity of information furnished to consumer reporting agencies.
The security of banks' systems and operations is essential to maintaining the privacy of customer information. In FY 2006, the FFIEC issued a revised "Information Security Booklet" that describes how a bank should protect the systems and facilities that process and maintain information. The revisions include updated information on authentication, monitoring programs, and software trustworthiness.
The OCC issued prohibition orders and, in several cases, ordered restitution or assessed CMPs against bank employees in six cases. These cases involved losses to bank customers because of identity theft committed by bank employees, or by third parties who received confidential customer information from bank employees.
To ensure fair access to financial services and fair treatment of bank customers, the OCC evaluates banks' compliance with consumer laws and regulations. Bank regulatory agencies use the Uniform Interagency Consumer Compliance Rating System to provide a general framework for assimilating and evaluating significant consumer compliance factors at a bank. Each bank receives a consumer compliance rating based on an evaluation of its compliance with consumer protection and civil rights statutes and regulations, and the adequacy of its systems for continued compliance. Ratings are on a scale of 1 through 5, in increasing order of supervisory concern. National banks continued to show strong compliance in FY 2006 with consumer protection regulations, with 94 percent earning a consumer compliance rating of either 1 or 2.
The OCC has a long history of responding aggressively in cases when it finds business practices that are predatory, abusive, unfair, or deceptive.
The OCC entered into a formal agreement in November 2005 with a national bank and its mortgage lending subsidiary requiring the bank to establish a $14 million fund to reimburse consumers harmed by the lack of appropriate controls in the bank's mortgage lending operations. Consumers entitled to restitution had: (1) paid origination fees and/or interest rates substantially different from those indicated on good faith estimates; (2) not had their creditworthiness adequately considered; (3) held subsidized loans that were refinanced with higher-cost loans, which did not appear to provide the consumers with a tangible benefit; or (4) applied for mortgage loans and were denied after receiving "preapproved" direct mail solicitations.
The agreement also required the bank to:
The OCC Customer Assistance Group (CAG) in Houston assists consumers who have questions or complaints about national banks or their operating subsidiaries. CAG refers complaints to the agency's law department if they (1) allege or raise concerns about possible unfair or deceptive practices, predatory lending practices, or fair lending law violations or other discriminatory practices; and (2) involve possible violations of consumer protection laws, or inconsistencies with OCC regulations or guidance.
CAG published a brochure in Spanish to assist Spanish-speaking bank customers.
Upon request from Congress, the Government Accountability Office (GAO) conducted an assessment of CAG in FY 2006. The GAO subsequently released a favorable report, noting that the OCC handles more complaints than any other federal banking agency.
The report also noted that OCC's bank examiners use consumer complaint information collected by CAG to plan or adjust examinations. CAG employees and OCC examiners regularly discuss specific complaints and complaint numbers for individual banks, and they coordinate in communicating consumer-related issues to bank officials.
"We are very proud of the work of our Customer Assistance Group," Comptroller Dugan said after the report's release. "Not only does the CAG assist customers with questions or complaints, but it helps national banks improve their customer service and it provides invaluable feedback that helps our examiners focus on problem areas."
The OCC is implementing three improvements recommended by the report: that the OCC measure customer satisfaction; revise the way it measures and reports on timeliness in resolving customer complaints; and find better ways to inform the public, state officials, and others about the OCC's role in handling consumer questions and complaints.
Over the last 12 months, nearly 70,000 telephone conversations began the same way: "Hello, thank you for calling the Office of the Comptroller of the Currency's Customer Assistance Group. How can I help you today?" At one end of the phone line, a customer had turned to the OCC for help. On the other end, a member of OCC's Customer Assistance Group responded.
While the volume of calls, e-mails, and written inquiries is large, the specialists who staff CAG's Houston facility never seem to tire of the work.
Serving consumers is "just where I get my kicks," said Rayburn Johnson, a 20-year OCC veteran with seven years experience in customer assistance. "It's what I was called to do in this life."
Added OCC Ombudsman Samuel P. Golden, whose office operates the CAG in Houston: "Customer service is not difficult if your heart is in it."
Callers' emotions vary, but the quality of service from CAG team members remains constant. "It's about trying to help as much as you can," said Vonda King, a Customer Assistance Specialist.
"Lots of times, folks just want to tell you the whole story and that's part of the process," Mr. Johnson added.
During the year, the OCC improved CAG service by expanding its hours. Under "Project Daylight," CAG now operates from 9 a.m. to 5 p.m. CST. Hours will soon expand further to 7 a.m. to 7 p.m.
Just as important, Project Daylight also initiated a tiered-service approach. That means call-center operators field initial calls, answer basic questions, and take basic information. More complex questions, unique issues, and Spanish-language inquiries, however, can be referred to more experienced OCC staff members.
"I really like this new approach," said Alicia Loya, Customer Assistance Specialist. "It gives us more time to speak with customers."
The CAG team views every complaint as an opportunity, according to Deputy Ombudsman Craig D. Stone. Some calls are an opportunity to educate consumers about applicable banking laws and to advise them of their rights. Other calls involve researching complaints about billing, credit card terms, checking accounts, mortgage loans, and other retail banking matters.
In the 12-month period ending in August 2006, the CAG team facilitated the return of nearly $7 million to consumers and, in the last five years, nearly $30 million. The vast majority of those cases involved less than $200. In many cases, good will-not bank errors-prompted the return of funds.
"At the end of the day, there's a lot of satisfaction because the consumers appreciate the effort," said Howard Greene, a CAG Customer Assistance Specialist.
Although customer service is its primary mission, the CAG team also evaluates the data gained through the volume of calls for insights on improving the OCC's bank supervisory process.
Analyses of the numbers of calls and categories of those calls point to areas of focus for bank examiners, such as compliance and managing the risks to bank reputation, according to Ombudsman Golden.
"Our systems give us the capability to look at data over time and identify trends and issues by product or banking regulation," he said.
Over the past few years, several important pieces of bank guidance originated from complaint data, including guidance related to predatory lending, unfair or deceptive practices, credit card rates, and overdraft protection.
Through this complaint analysis and follow-up action, the OCC leverages its authority as the primary regulator of national banks to achieve its goals of ensuring the safety and soundness of the financial system, while ensuring equal access and fair treatment for bank customers.
Thank you very much for getting involved in my case about the bank unfairly raising my credit card interest rate. They have now corrected the problem and there is no question it is only because your organization became involved. Thank you again, you are so important to the "little guy" in these situations. -John D.
Thank you for the prompt attention your agency gave the matter. In addition not only was my issue taken seriously by your agency, but you [also] kept me informed of the progress. -Daniel M.
My sincere thanks to you for achieving in a week, what I was unable to accomplish in almost a year. For you and [your] staff, please accept my deepest appreciation for the fine work you do everyday for others like me. -Sally B.
The OCC is a strong supporter of national banks' investments to revitalize neighborhoods and highly values its relationships with community groups and organizations dedicated to community development.
Throughout the fiscal year, OCC officials met with community groups and consumer organizations on issues of interest, including credit card fees and disclosures, nontraditional mortgages, fair lending, electronic check cashing fees, and predatory appraisals.
The Comptroller saw firsthand how banks can make a positive impact on communities when he visited Chicago's West Side in May to tour housing and community development projects that are contributing to the economic well-being of neighborhoods. The OCC's authority to approve national banks' investments in community development projects comes from a provision in federal law known as "Part 24."
"The trip highlighted in a very visible way the important role that national bank Part 24 public welfare investment authority plays in local communities," Mr. Dugan said at the end of that tour. "Community-based organizations have partnered with national banks in a number of key projects in the Near West Side to create affordable housing using low-income housing tax credits in which banks are major investors."
The Comptroller and members of his family also joined other OCC employees and their families in sprucing up apartments for families participating in a NeighborWorks America housing program in Northeast Washington, D.C.
The OCC produces publications to help banks meet their obligations under the CRA. Agency officials also held more than 300 consultations with bank executives during the year on strategies for fulfilling those obligations.
Other agency publications provide information about bank-owned community development corporations, financial literacy, hurricane recovery assistance, rural economic development, and low-income housing tax credits.
The OCC also produces an electronic newsletter with information about agency work in the area of fair treatment and fair access to financial services.
The OCC helped to organize and participated in the first of several regional conferences on the "unbanked"-consumers who have no accounts or loans with banks. The OCC and other financial regulators also sponsored a National Reinvestment Conference that brought together experts on strategies for revitalizing distressed communities. More than 500 bankers, government officials, and community representatives attended.
The OCC participates in the interagency Financial Literacy and Education Commission (FLEC) established to improve financial literacy and education in the U.S. In FY 2006, FLEC issued a strategy paper and launched MyMoney.gov, a Web site dedicated to teaching Americans the basics of financial education.
The national bank charter is a unique and powerful instrument for carrying on the competitive business of banking. This charter offers national banks a legal framework that enables them to compete effectively and meet the evolving business needs of their customers, under a flexible and responsive system of supervision.
To set the bounds of activities permissible under the charter, the OCC establishes regulations, policies, operating guidance, and interpretations that set standards for the national banking system, define acceptable banking practices, provide guidance on risks and responsibilities facing national banks, and prohibit or restrict banking practices deemed imprudent or unsafe. The OCC also represents and defends its regulatory authorities and interpretations in administrative, judicial, and congressional hearings.
In response to inquiries from national banks, the OCC writes legal and regulatory opinions on a wide variety of banking-related topics, including the following:
Regulatory capital requirements include risk-based capital, in which risk weights are assigned to specific types of assets and off-balance-sheet items to ensure that banks have adequate capital levels.
These permissible derivatives activities are subject to supervisory nonobjection based on the adequacy of the national bank's risk management and measurement systems and controls and other supervisory considerations relevant to the particular proposal. Derivatives and hedging provide banks and their customers with a mechanism to reduce risks associated with financial holdings and transactions.
The OCC was a party to, or prepared "friend of the court" briefs for, several cases that affirmed federal preemption of state law restricting national bank activities, including:
Significant rulemakings completed in FY 2006 included:
The OCC grants national bank charters and approves the establishment or expansion of banking activities of existing national banks. The Comptroller's Licensing Manual outlines OCC procedures for handling licensing applications; the agency revised six booklets from the manual in FY 2006.
The OCC has several initiatives to evaluate and enhance its licensing programs, including a quality control program to improve procedures for processing bank applications for branches and de novo charters.
The OCC made several significant licensing decisions in FY 2006:
| Table 3: Corporate Application Activity, FY 2005 and 2006 | ||||||
|---|---|---|---|---|---|---|
| Applications received | FY 2006 Decisions | |||||
| FY 2005 | FY 2006 | Approved | Conditionally approved4 | Denied | Total | |
| Branches | 1,645 | 1,872 | 1783 | 2 | 2 | 1,790 |
| Capital/sub debt | 141 | 167 | 50 | 5 | 0 | 55 |
| Change in Bank Control | 17 | 9 | 4 | 0 | 0 | 8 |
| Charters | 26 | 47 | 4 | 30 | 0 | 34 |
| Conversions1 | 15 | 15 | 5 | 7 | 0 | 12 |
| Federal branches | 2 | 3 | 0 | 2 | 0 | 2 |
| Fiduciary powers | 22 | 30 | 13 | 1 | 0 | 14 |
| Mergers2 | 69 | 62 | 61 | 3 | 0 | 64 |
| Relocations | 259 | 274 | 269 | 0 | 0 | 271 |
| Reorganizations | 116 | 123 | 122 | 10 | 0 | 132 |
| Stock appraisals | 2 | 0 | 0 | 0 | 0 | 2 |
| Subsidiaries3 | 23 | 27 | 30 | 4 | 0 | 35 |
| 12 CFR 5.53 Change in Assets | 4 | 3 | 0 | 5 | 0 | 5 |
| LTD NB upgrade | NA | 5 | 0 | 1 | 0 | 1 |
| Total | 2,341 | 2,637 | 2,341 | 70 | 2 | 2,425 |
| 1 Conversions are conversions to national bank charters. | ||||||
| 2 Mergers include failure transactions when the national bank is the resulting institution. | ||||||
| 3 This count does not include 128 After-the-Fact notices received in FY 2005 and 93 After-the-Fact notices received in FY 2006. | ||||||
| 4 On April 14, 2000, the Licensing department issued guidance imposing special conditional approval for all bank charters requiring the OCC to be notified before a significant deviation or change in the operating plan during the first three years of operation. | ||||||
| Table 4: OCC Licensing Actions and Timeliness, FY 2005 and 2006 | |||||||
|---|---|---|---|---|---|---|---|
| FY 2005 | FY 2006 | ||||||
| Within Target | Within target | ||||||
| Application type | Target time frames in days1 | Number of decisions | Number | % | Number of decisions | Number | % |
| Branches | 45 / 60 | 1,550 | 1,519 | 98 | 1,790 | 1,721 | 96 |
| Capital / sub debt | 30 / 45 | 57 | 48 | 84 | 55 | 48 | 87 |
| Change in Bank Control | NA / 60 | 17 | 17 | 100 | 8 | 8 | 100 |
| Charters2 | See footnote 2 | 20 | 17 | 85 | 34 | 21 | 62 |
| Conversions | 30 / 90 | 16 | 7 | 44 | 12 | 9 | 75 |
| Federal branches | NA / 120 | 0 | 0 | NA | 2 | 1 | 50 |
| Fiduciary powers | 30 / 45 | 11 | 6 | 55 | 14 | 9 | 64 |
| Mergers | 45 / 60 | 63 | 53 | 84 | 64 | 54 | 84 |
| Relocations | 45 / 60 | 242 | 237 | 98 | 271 | 267 | 99 |
| Reorganizations | 45 / 60 | 107 | 88 | 82 | 132 | 100 | 76 |
| Stock appraisals | NA / 90 | 0 | 0 | NA | 2 | 2 | 100 |
| Subsidiaries | 30 / 60 | 43 | 43 | 10 | 35 | 35 | 100 |
| 12 CFR 5.53 Change in Assets | NA / 60 | 2 | 1 | 50 | 5 | 4 | 80 |
| LTD NB upgrade2 | See footnote 2 | 0 | 0 | NA | 1 | 0 | 0 |
| Total | NA | 2,128 | 2,036 | 96 | 2,425 | 2,279 | 94 |
| Note: Most decisions (99 percent in 2005 and 98 percent 2006) were decided in the district offices and Large Bank Licensing under delegated authority. Decisions include approvals, conditional approvals, and denials. | |||||||
| 1 Those filings that qualify for the "expedited review" process are subject to the shorter of the time frames listed. The longer time frame is the standard benchmark for more complex applications. New time frames commenced in 1997 with the adoption of the revised Part 5. The target time frame may be extended if the OCC needs additional information to reach a decision, permits additional time for public comment, or processes a group of related filings as one transaction. | |||||||
| 2 For independent charter applications, the target time frame is 120 days. For holding-company-sponsored applications, the target time frame is 45 days for applications eligible for expedited review, and 90 days for all others. | |||||||
| Table 5: Change in Bank Control Act1 CY 2002-FY2006 | |||||
|---|---|---|---|---|---|
| Year | Received | Acted On | Not Disapproved | Disapproved | Withdrawn |
| FY 2006 | 9 | 8 | 4 | 0 | 4 |
| FY 2005 | 17 | 17 | 17 | 0 | 0 |
| FY 2004 | 16 | 142 | 13 | 0 | 0 |
| FY 2003* | 16 | 10 | 9 | 1 | 0 |
| CY 2002 | 0 | 10 | 9 | 1 | 0 |
| * Reporting changed from calendar year to fiscal year, starting October 1, 2002 (FY 2003). | |||||
| 1 Notices processed with disposition. | |||||
| 2 Includes one notice with no activity. The OCC considered it abandoned. | |||||
The OCC administers the Change in Bank Control Act (CBCA) to prevent adverse effects from anti-competitive mergers, acquisitions, consolidations, or other business combinations; inadequate financial support; or unsuitable management of national banks. The OCC reviews each CBCA notice and disapproves transactions that could have serious harmful effects. When the notice raises fundamental supervisory or other issues that cannot be mitigated through an agreement, the OCC disapproves the proposal. The OCC is coordinating with Federal Reserve banks on CBCA applications so the OCC can seek certain safeguards from acquiring holding companies of national banks.
The OCC received adverse comments from the public and subsequently rendered decisions on the following 10 CRA-covered applications during the year.
| Table 6: Applications Decided That Presented Community Reinvestment Act Issues, FY 2006 | ||
|---|---|---|
| Bank, City, State | Interpretations and Actions | Document Number |
| Citibank, NA, New York, NY | October 2005 | CRA Decision No. 126 |
| Associated Bank, NA, Green Bay, WI | November 2005 | CRA Decision No. 127 |
| JPMorgan Chase Bank, NA, Columbus, OH | December 2005 | CRA Decision No. 128 |
| HSBC Bank Nevada, NA, Las Vegas, NV | November 2005 | CRA Decision No. 129 |
| NBT Bank, NA, Norwich, NY | January 2006 | CRA Decision No. 130 |
| TD Banknorth, NA, Portland, ME | December 2005 | CRA Decision No. 131 |
| Harris, NA, Chicago, IL | ebruary 2006 | CRA Decision No. 132 |
| Huntington National Bank, Columbus, OH | February 2006 | CRA Decision No. 133 |
| Rabobank, NA, EL Centro, CA | May 2006 | CRA Decision No. 134 |
| Trustmark National Bank, Jackson, MS | September 2006 | CRA Decision No. 135 |
The OCC and the other FFIEC-member agencies have participated in a comprehensive multi-year review of the agencies' regulations, as required by the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA). The purpose of the review is to identify and, as appropriate, eliminate unnecessary regulations. In FY 2006, the agencies completed the process of publishing their regulations in the Federal Register for public comment and concluded a series of outreach meetings in conjunction with the requests for written comment. As required by the statute, the agencies plan to submit a report to Congress in FY 2007 on the results of their review. In addition, the OCC is considering what revisions to its regulations are appropriate in light of the results of the EGRPRA review.
On October 13, 2006, the President signed into law the Financial Services Regulatory Relief Act. This legislation contains provisions that contribute to the reduction of unnecessary regulatory burden for national banks, including provisions that:
The OCC pursued an array of management initiatives in FY 2006 to achieve its goals for human capital, security, process improvement, and technology.
The OCC supervises a remarkably diverse group of institutions, ranging from small community banks to the world's largest financial institutions. To carry out the agency's supervisory mission, the Comptroller and the Executive Committee have made a top priority of maintaining a diverse, highly skilled, and strategically deployed workforce.
In response to challenges posed by impending civil service retirements and the need to foster the evolution of the agency's future leadership team, the OCC has mounted a broad initiative to recruit, retain, and develop employees with the necessary skills and qualities. BusinessWeek magazine recognized the quality of the OCC work environment during this fiscal year by naming the OCC one of the "50 best places to launch a career."
In executing its comprehensive strategy, the agency is recruiting both highly experienced and entry-level employees, and shifting internal expertise to where it is needed most. During the fiscal year, the OCC hired an unprecedented number of industry specialists for Large Bank Supervision. These specialists are seasoned experts from banks and elsewhere in the financial world who want to steer their career paths toward public service. By continually introducing new expertise to its workforce, the OCC enjoys the benefits of a stream of fresh ideas that keep the OCC at the forefront of the banking industry. Most of these highly experienced new employees work in key financial centers, such as New York and Charlotte.
After hiring employees, the agency moves its focus to training and retaining them. On large bank teams, the OCC recently established a program for bringing the newly hired industry specialists on board, assigning a highly skilled advisor to each of them, teaching them about the culture and policies of the agency, providing regular feedback on performance, and soliciting their comments on their initial experiences at the OCC.
Internal recruitment in FY 2006 concentrated on redeploying examiner expertise to the supervision policy group led by the Chief National Bank Examiner and to large banks in high-cost cities. To attract internal candidates, the OCC emphasized the importance of these assignments to career advancement and provided incentives, including relocation bonuses, mortgage subsidies, financial assistance for renters, and transitional cost-of-living reimbursements.
The OCC also continued its nationwide program to recruit and train entry-level bank examiners. Building on the relationships reestablished three years ago with colleges across the nation, the agency competed for the best talent and hired 162 entry-level examiners in FY 2006. This pool of examiners was distinctive not only for the high quality of the individuals hired, but for the diversity of the pool as a whole. Fifty-one percent of these new examiners are women and 29 percent are minorities.
Since the inception of this program in 2003, the agency has brought aboard about 430 entry-level examiners. The agency also instituted an aggressive retention program to keep these new employees after their critical first five years, when many examiners make a decision about whether to continue their careers with the OCC.
For an examiner out of college, a near-term goal is to pass the Uniform Commission Examination to become a National Bank Examiner, a title that carries high credibility at the OCC and throughout the financial industry. Once the OCC instills basic skills in a new bank examiner, the emphasis often turns toward identifying and developing skills in key specialty areas. This skill development feeds the pipeline from community bank supervision to jobs in large banks or Headquarters.
The agency's Committee on Bank Supervision, made up of three Senior Deputy Comptrollers, is undertaking a major project centered on those key specialty skills: Asset Management, Bank Information Technology, Capital Markets, Compliance, Commercial Lending, Retail Lending, Mortgage Banking, and Operational Risk. A project team of managers and subject matter experts from those eight critical business lines developed a Specialty Skills Assessment framework that, when fully implemented, will help bank supervision managers identify resource needs and available expertise with greater precision. That will allow the agency to maximize its use of existing resources and to develop strategic plans to meet future staffing needs.
FY 2006 also marked the establishment of the Office of Leadership, Learning, and Workplace Fairness (LLWF), which supports OCC's commitment to equal employment opportunity, succession planning, and high-quality learning.
The OCC has strengthened its leadership programs, recognizing that strong leaders are the key to maintaining the strategic direction of the agency and effective bank supervision in the future. The agency built a leadership development framework and wrote a strategic plan for a comprehensive program to train current and future leaders. This program includes a leadership development advisory board, five pilot leadership development courses focusing on key competencies, an executive coaching program, and a manager forum to enhance knowledge-sharing, learning, and skill development.
The OCC also introduced the "LeaderTRACK" program during the fiscal year to manage succession and prepare leaders for bank supervision. The program, which will be piloted for 18 months beginning in FY 2007, offers six participants a series of assignments with significant managerial and supervisory ro