FOR IMMEDIATE RELEASE
February 27, 2007
Contact: Kevin M. Mukri
Comptroller Dugan Says Regulators and Industry Both Benefit From Inter-connection between Regulation and Risk Management
NEW YORK — Comptroller of the Currency John C. Dugan told an audience of bank risk managers today that, because their goals are so closely aligned to those of the regulators, the regulations and guidance issued by the agencies can support them in meeting their firms' objectives.
For example, he said, regulators can highlight concerns that are important to risk managers, but which others in the bank might prefer to ignore for competitive reasons. An example is the interagency guidance on non-traditional mortgages, which establishes expectations for prudent underwriting, taking into account some of the unique features and risks these products present.
"A single bank applying these underwriting standards on its own would be less risky, but could well be priced out of the market," Mr. Dugan said in a speech to a conference sponsored by the Global Association of Risk Professionals. "By applying this guidance widely and consistently, to both bank and nonbank lenders, risk is reduced across the financial system, at all affected firms."
The Comptroller added that these kinds of benefits can be maximized if regulatory standards are thoughtfully designed to align with sound risk management practices. "That means that we regulators have an obligation to approach the development of any new rules with a solid grasp of what you and your colleagues do," he said.
Mr. Dugan said rules that build from what bank risk managers already do allow the regulatory agencies to accomplish policy objectives without adding significantly to compliance burden. In addition, he said, those kinds of rules can be principles-based, rather than turning into a detailed set of prescriptive requirements that are followed only as a compliance exercise.
"Rules that reflect sound industry practice are much less likely to lead to attempts to evade misguided regulatory standards," Mr. Dugan added. "I would much rather have the intellect and creativity of this audience focused on providing financial services and running good institutions than on evading poorly designed rules."
In the Basel II capital framework, Comptroller Dugan said, regulators were able to provide a sound conceptual framework for large bank capital standards in large part because they engaged in an extensive exploration of emerging industry practices in risk measurement.
Mr. Dugan said he supports the Basel standard, and said one of the most important things about it is that it will encourage good risk management. Compared to current standards, he said, Basel II will be more risk-sensitive; better suited to the structure, activities, and operation of modern, large financial firms; and better able to adapt to changes in the nature of banking activity. And it will provide better information to regulators and the markets through regulatory reporting and disclosure.
"Still, the thing about a risk-sensitive capital standard is that it is supposed to be sensitive to risk," the Comptroller added. "If risk is higher at a bank, I want that bank holding more capital. But it shouldn't be one-sided. In cases where we can achieve an appropriate level of comfort that risk is truly reduced, then lower capital is warranted."
The key question, Mr. Dugan said, is how regulators can become confident that an individual bank's risk has fallen to the point that lower capital is appropriate.
"This is where sound risk management comes in," he said. "If we can gain enough comfort that institutions are assessing and managing risk well, that they have a firm grasp on their own capital adequacy, with trustworthy internal processes that give great confidence that risks have been identified, assessed, and managed – that risk is indeed low – then the case for lower capital to match that lower risk is significantly strengthened."
The OCC, with its full-time presence at the largest national banks and its continuous approach to bank supervision, has a deep understanding of each institution's processes and the risks it faces, as well as how those risks are managed.
"We believe this unique supervisory model, combined with the composition of the population of banks we supervise – some of the largest, most complex institutions in the world – gives us the insight and the confidence to judge whether changes in the capital position of a bank truly correspond to changes in risk," he said.
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