Acting Comptroller Williams Addresses Bank Merger Issues in House Testimony

WASHINGTON, D.C. — The Office of the Comptroller of the Currency has undertaken a number of initiatives that will enable it to supervise large institutions such as those that would be created in a series of recently-announced mergers, acting Comptroller Julie L. Williams told a House committee Wednesday.

In testimony before the House Committee on Banking and Financial Services, Ms. Williams also said the OCC will carefully monitor the impact of mergers upon consumers. The agency will pay particular attention to privacy concerns, community development issues and the impact of consolidation on the fees banks charge their customers.

Elaborating on the OCC's response to the merger announcements, Ms. Williams said examiners assigned to each of the institutions involved in the proposed mergers have begun to coordinate supervisory strategies. They have identified strengths and weaknesses at each institution and will closely monitor the banks to ensure that appropriate risk management controls are maintained as the mergers are implemented.

The OCC has spent the last five years developing a supervision- by-risk approach that gives the agency the tools it needs to supervise bigger and more complex institutions, she told the House panel. Supervision by risk focuses examiner resources on those activities with the most potential to generate losses at a bank.

"Whereas our historical supervisory practices were essentially reactive, supervision by risk enables us to anticipate and deal with bank problems before they become entrenched," she said.

The OCC has mapped plans to convene a special meeting of examiners most experienced in big bank mergers to review issues they encountered in those transactions and to identify "best practices" that were employed to deal with those issues.

Among the issues the agency has identified as a potential problem is asset concentrations. To invest larger pools of funds efficiently, larger organizations tend to engage in bigger transactions. Those loans will be more visible and any problems that develop will have a more dramatic impact upon the reputation of the institution.

The OCC issued comprehensive Loan Portfolio Management guidance last month to promote more sophisticated evaluation of portfolio risk. In addition, examiners will closely supervise efforts by bank management to identify and control loan and investment concentrations, and will ensure that appropriate contingency plans are in place. The agency is also using Ph.D. economists from the Risk Analysis Division to evaluate a bank's efforts to identify, measure, monitor and control asset and liability concentrations.

Ms. Williams also told the House committee that the OCC will closely monitor the impact of the proposed mergers upon low-income communities. However, she noted that large institutions interested in expanding through acquisitions have an interest in building a strong Community Reinvestment Act record, and the majority of recent CRA lending commitments to low-income communities were made by banks active in mergers and acquisitions.

The OCC will require acquiring banks to state whether they will honor CRA commitments made by target institutions. The OCC will deny expedited processing to those that do not, and will investigate the situation as part of the application process.

The OCC will also closely monitor the impact of the mergers on the fees that consumers pay for banking services. However, Ms. Williams noted that the pricing of bank services is complex and it is not always easy to identify the precise reasons for differences in bank product prices.

"This is an area where the OCC will remain vigilant, with a particular concern about access to financial services by low- and moderate-income individuals," Ms. Williams said.

In her testimony, Ms. Williams warned banks to pay attention to consumer privacy concerns.

"As financial firms get larger and engage in more types of activities, they also gain more and more information about their customers, including medical, credit and investment information," she said. "This is a critical area of focus for bank management and bank supervisors. Failure to deal responsibly with this issue risks a customer backlash that could disable the company from utilizing one of its most precious resources: its customer information."

Ms. Williams also told the committee that the mergers have heightened her concern about provisions in pending financial modernization legislation that would force activities out of banks and into subsidiaries of the parent holding company. Banks should be free to choose the organizational structure that best enables them to operate efficiently and compete effectively, she said.

"Particularly when faced with the prospect of competing against giant financial conglomerates, banks — of all sizes — should not be subject to artificial constraints on their ability to compete," she added.

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