FOR IMMEDIATE RELEASE
February 18, 1998
Contact: Public Affairs
Comptroller Warns on Industry Lending Practices
WASHINGTON — Comptroller of the Currency Eugene A. Ludwig today urged banks to tighten loan underwriting standards and said his agency is preparing to release new guidance that will help institutions develop and apply advanced portfolio management techniques.
"Not all banks need to have state-of-the-art portfolio management capabilities, but many of those that do — the institutions with the largest, most complex loan portfolios — clearly lack them, despite the demonstrable link between loan losses and shareholder values," Mr. Ludwig said. "Clearly this is one area where banks have a need to improve."
Mr. Ludwig said the industry suffers from an abundance of liquidity, a condition that has led to serious problems for banks in the past. Much of this liquidity is coming from abroad — including East Asia — as investors seek safety in U.S. markets.
"Even before Asia, razor-thin margins, lengthening tenors and highly-leveraged transactions had become increasingly common," he noted. "Many bankers wondered aloud how they could possibly make money on some deals, but chose to do them nevertheless for fear that a customer might be lost to the competition."
The Comptroller said the agency's examiners have nearly completed a round of talks with the chief executive officers of all national banks that he ordered last October after an OCC survey found that loan underwriting trends were growing weaker.
Mr. Ludwig said he was pleased at the corrective action taken by some institutions. For example, some large banks that made strategic decisions to take on additional risks in specific markets have created loan workout units despite the current low level of problem assets. Some community banks have revised their loan policies, while others are beefing up their collection capabilities.
However, these steps "apply only to a minority of the institutions under our supervision," he said, and it is vital that prudent, anticipatory action become the rule throughout the industry."
In reviewing bank loan portfolios, OCC bank examiners have recently identified three specific categories of concern about their banks' credit practices, Mr. Ludwig said. The examiners found that some banks are:
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