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News Release 2008-44 | April 16, 2008

Lessons Learned from Last Downturn Will Help OCC Deal with Problems in the Current Environment

WASHINGTON—Comptroller of the Currency John C. Dugan said today that, with problem loans rising, it's imperative that bank management identify and address problems realistically and that the OCC deal with national banks in a consistent and balanced way.

The OCC has spent a good deal of time evaluating what went wrong during the late 1980s and early 1990s, and the lessons learned from that period - including a recognition of mistakes made by the OCC - will help the agency deal with problems in the current environment, Mr. Dugan said in a speech to the Exchequer Club.

In the last real estate downturn, he said, OCC examiners tended to make unilateral adjustments to real estate appraisals that had become outdated due to clear changes in the markets. Today, he said, the OCC's preference is to direct management to obtain a new appraisal, and then give the bank a reasonable amount of time to review that appraisal and use it to make decisions about how to classify loans.

The Comptroller also noted that the OCC did not give enough credit in the last downturn to bank management that was dealing realistically with problems.

"When we see that bank management is realistically recognizing losses and taking tough steps to deal with problems, we are going to give the bank more latitude than we will when we find a management team in denial that forces us to do their work for them," the Comptroller said.

Comptroller Dugan stressed the importance of effective two-way communication and said that was an area in which both the OCC and the banks it supervises fell short in the earlier period.

"We aim not to repeat that mistake," he said. "Our regulatory expectations must be clearly articulated, consistently applied, and effectively enforced."

Banks also need to be forthright. "There is a natural tendency for banks experiencing difficulties to regard examiners with trepidation and to say as little as possible," Mr. Dugan said. "I would encourage banks in these circumstances to take exactly the opposite approach - to engage their examiners even more than they might have in good times. Why? Because when problems arise, our examiners need more information, not less, to understand the true dimensions of the bank's problems - rather than assuming the worst."

The Comptroller pointed to commercial real estate loans, which played an outsized role in the banking downturn of the late 1980s and early 1990s, and said too many community banks today are having too hard a time coming to grips with problems in these portfolios.

"These bankers are reluctant to charge off obviously troubled loans or even to flag problems to their examiners," he said. "While this resistance to recognizing problems at the beginning of an economic downturn may be human nature, it's not healthy, because denial is not a strategy."

The Comptroller underscored that the OCC plans to work with community banks to address problems as they arise.

"That process works best with a combination of early and realistic problem identification by bank management, frequent and robust communication between bankers and examiners, and balanced supervision," the Comptroller said. "If we do all that, we'll go a long way towards achieving our common goal: to make sure that banks remain safe and sound, and continue to meet the credit needs of a growing and prosperous America."

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