Comptroller Dugan tells House Panel OCC Takes Balanced Approach in Examinations, But Warns that Lower Demand, Distressed Banks, and Tighter Underwriting Present Ongoing Challenges to Loan Growth

WASHINGTON—Comptroller of the Currency John C. Dugan told a Congressional panel today that access to credit is critical to the health of our nation’s economy and that national banks play a vital role in meeting this need.

"The OCC has always encouraged national banks to lend to creditworthy borrowers," he said in testimony before a joint hearing of the House Financial Services Committee and the House Small Business Committee. "In fact, banks cannot be healthy and profitable if they do not continue to focus on making sound loans to businesses and consumers."

The Comptroller said one reason for reduced lending is the lack of demand. In the face of economic uncertainty, both consumers and businesses have cut back on spending, he said. However, he added, lenders have also become more cautious. Loan underwriting standards have tightened, reflecting a return to more prudent practices, and some banks have shifted resources away from lending so they can deal with problem loans.

"We recognize that this environment presents particular challenges to the OCC and the other banking regulators," Comptroller Dugan said. "It is imperative that we take a balanced and consistent supervisory approach to ensure that our actions do not discourage banks from making loans to creditworthy borrowers."

The Comptroller said the OCC has consistently instructed examiners not to tell bankers which loans to approve and which to deny, and not to criticize loans based simply on collateral values or a borrower’s association with a particular industry or geographic location. Instead, the OCC has stressed that national banks should:

• Make sound loans to creditworthy borrowers;
• Work with borrowers who are facing difficulties; and
• Recognize and address problem credits by maintaining appropriate reserves and taking charge-offs when payment is unlikely.

Mr. Dugan also struck a cautionary note, saying that 185 banks have failed since the onset of the financial crisis, and failures are likely to be up this year over 2009.

"While we should be very careful not to encourage the banks we supervise to become excessively conservative, we simply cannot turn a blind eye to increasing losses and mounting credit problems," he said. "In this environment, we need to avoid the kind of forbearance that put off problems and caused such huge losses in the savings and loan crisis, an experience that led Congress to enact the Prompt Corrective Action regulatory regime in 1991."

Prompt Corrective Action, he said, "reinforced to supervisors how important it is for institutions to realistically recognize losses and deal with them – both to avoid further problems and, more important, to put themselves in a better position going forward to make loans to creditworthy borrowers."

Related Links

• Comptroller of the Currency John C. Dugan
• Oral Statement (PDF)
• Written Testimony (PDF)