For Immediate Release Contact: Robert Garsson

NR 2000-79 (202) 874-5770

Remarks by

Mark A. Nishan

Chief of Staff

Office of the Comptroller of the Currency

Before the Community Bank Directors

Hershey, Pennsylvania

October 11, 2000

In the opening scenes of famed director Frank Capra's depression-era
feature, [American Madness,]{.underline} a rebellion is brewing in the
boardroom of the Union National Bank. The directors, watching the
banking system collapsing around them, have lost confidence in the
liberal lending policies of the bank's president, played by Walter
Huston, and demand that he agree to a merger with another institution.
Huston's character refuses, vowing to continue to make loans based on
the borrower's good character. \"Faith,\" he says in a defiant coda,
\"is the only thing that matters to me\" \-- and the only thing, he
insists, that would lift the country out of depression and return it to
prosperity.

There's no question about who's cast as the hero in this encounter. It's
Huston's character battling against the tide of ignorance, fear, and
self-doubt that gave Capra his title: \"American Madness.\" Yet,
although not depicted nearly as sympathetically, the board also had a
legitimate point and expressed it unambiguously.

So while the Union National of 1932 is hardly a model of what good
management and board relations should be, Capra's film does dramatize a
situation we could stand to see more of \-- directors taking an active
and independent role in overseeing a bank's affairs \-- and, when
appropriate, challenging management, instead of merely rubber-stamping
its decisions.

That's one of the things I'd like to talk to you about today.

Corporate governance in this country has been the target of a fair
amount of criticism in recent years \-- much of it justified. Too often,
outside directorships have gone to people whose major qualification is a
nice personality and a willingness not to rock the boat. During the
early 1990s, at a U.S. company that was once synonymous with the
personal computer, the board was one big happy family, blissfully
unfamiliar with the personal computing business. In fact, only a few of
the directors had ever [used]{.underline} a personal computer. The
results for this company were predictably disastrous.

Unfortunately, it's just as common \-- and just as wrongheaded \-- when
companies appoint competent directors \-- people who actually
[know]{.underline} something about the business they're supposed to
oversee \-- and then leave those people there to languish \-- unnoticed,
unheeded, and unloved.

I wish I could say that the banking industry has been the shining
exception to these practices. But I can't.

Maybe there was a time when banks could afford to forego the benefits of
a strong, professional, and independent board of directors. But you'd
have to go back to the days when even badly managed institutions raked
in big deposits and big profits. I don't have to tell you that those
days are long gone.

By comparison, today's banking environment can be summed up in two
words: challenge and opportunity.

On the one hand, the market for financial services has never been bigger
\-- or better. Americans are wealthier than ever before. But \"you ain't
seen nothin' yet.\" Economists estimate that the next 20 years will
bring the greatest net transfer of collective wealth since time began.
We're talking about real money here: some \$8 [trillion]{.underline} in
assets \-- assets that will be passed down from the parents of baby
boomers to their children. That works out to roughly \$50,000 per boomer
family. For providers of financial services, numbers like that can get
your heart racing faster than a ride on the Sooper Dooper Looper over at
Hershey Park.

And yet the affluent and soon-to-become affluent may not even be the
most lucrative market out there waiting to be tapped. Right now, at the
other end of the spectrum, there are communities all across our country
where banks are as uncommon as spinach soufflé inside the Hershey
chocolate works. And then there are communities with plenty of banks \--
yours may be among them \-- but still substantial numbers of people who,
by choice or necessity, rely on high-cost, nonbank providers for such
basic services as bill payment, check cashing, and short-term loans. If
these people can be introduced to the financial mainstream, the
potential rewards \-- for them, for our economy, and for the financial
institutions that reach out to them \-- can be enormous.

That's what I call opportunity \-- and challenge.

It's a challenge because banks can't just sit back and assume that a
major share of this wealth will automatically drop into their laps, the
way it once did. In fact, they can't even assume that they'll hang on to
what they've already got: many banks have seen their late customers'
sons and daughters withdraw their inheritance as soon as they were free
to do so. Today's financial consumers \-- at both ends of the spectrum
\-- have many other options. Regrettably, Americans at all income levels
no longer take for granted that banks are the best places to do the
business that banks used to dominate.

The industry analyst who wrote that \"banking is essential to the modern
economy, but banks are not,\" spoke a basic truth, although it's one
that none of us really want to hear. But admitting you have a problem is
the first step toward solving it.

It's not going to be easy for bankers to reclaim their old preeminence,
and it won't be easy to capitalize on the opportunities that lie ahead.
Experience teaches us that market share lost is often lost forever.
Recapturing the banker's traditional market won't be easy, because it
involves reversing habits that have themselves been years in the making.

In case you doubt the magnitude of the challenge the industry faces,
consider what I'll call Exhibit A. Last I looked, the Dow Jones
industrial average had fallen about 8 percent since the beginning of
this year. For the NASDAQ, the decline has been roughly 10 percent. Yet
the net assets of the nation's mutual funds have [increased]{.underline}
\-- by over \$200 billion \-- over that same period. If the current
correction on Wall Street hasn't put a damper on Americans' infatuation
with the stock market and non-traditional approaches to wealth-building,
then I'm afraid that nothing short of a seismic shift in our economy
will.

Or consider Exhibit B. The past decade has seen noteworthy efforts by
government and nonprofits and a fair number of financial institutions to
publicize the advantages of bank accounts and to make them more
accessible. Studies have shown that over the course of a lifetime, a
person without a bank account could incur fees of more than \$15,000 for
cashing checks and paying bills. The many long-term benefits of bank
accounts for wealth-building are increasingly understood. Yet, over the
last decade, the number of check-cashing outlets nationwide has more
than tripled.

Check-cashers, payday lenders, and pawnshop keepers may not operate
widely in your community. But the growth of what we sometimes refer to
as fringe banking represents a big problem for the whole industry.

For banks generally \-- and for community banks particularly \-- this
shift in the norms of financial behavior \-- in our traditional
approaches to savings and investment and transactions \-- has involved a
host of operational challenges. The loss of core deposits has forced
banks to increase their reliance on higher-cost, more volatile wholesale
funding. It's required banks to pour resources into advanced delivery
systems \-\-- ATMs, on-line, and telephone banking \-- because today's
sophisticated consumers won't settle for anything less. New products and
services have had to be introduced on the fly to keep up with the
fast-moving competition. And while all this has been going on, the bar
of corporate performance has continued to rise. Banks today are expected
to post returns on assets that, on first blush, seem wholly incompatible
with the goals of safety and soundness.

How many of you worry about meeting expectations to consistently
outperform the previous quarter or year \-- and, at the same time, make
only sound loans?

Obviously, some banks will thrive and others will falter in the face of
these challenges. Some will seize the opportunities presented by new
markets and others will come up empty-handed. But how can we tell the
potential winners from the losers? If you were one of those banking
industry analysts whose livelihood depended on handicapping the
competition, what would [you]{.underline} be looking for in making your
picks?

I'd suggest starting with the words of one of our most esteemed living
philosophers \-- one Joseph Vincent Paterno, who, I'm told, is also
loosely associated with a certain college football program. \"The will
to win is important,\" Joe often says. \"But the will to
[prepare]{.underline} is vital.\" That's as true for banks as it is for
the Nittany Lions.

Preparation [is]{.underline} the key these days, not only for
anticipating and serving the needs of the burgeoning base of financial
consumers, but also in getting ready for the challenges the financial
environment is almost certain to throw our way in the months and years
to come.

To paraphrase the sixteenth president of the United States \-- four
years and three Comptrollers ago, the OCC started talking about the
dangers of slipping underwriting standards and declining credit quality
in bank portfolios. Actually, as some of you may know, the OCC has been
monitoring risk in the banking system since the days of Lincoln himself.
When we see negative trends, we have always taken it upon ourselves to
bring those concerns to the attention of the people who are in the best
position to do something about it \-- you.

In recent years, we've made a special effort to remind bankers \-- in a
time of great general prosperity \-- not to lose sight of the
fundamentals of good banking. We urged bankers to look at a potential
borrower's overall debt burden, to price loans fairly, to walk away from
deals that made no business sense for the bank, and to stress-test early
and often, recognizing that even in optimistic scenarios, the economic
expansion was not likely to outlast most of the loans then being booked.

And we urged banks to maintain the rigor of internal controls \-- an
area that too often gets the short end of the stick when banks are under
earnings and cost-cutting pressures, as most have been in recent years.
Board oversight is perhaps [the]{.underline} crucial component of any
internal controls regime.

We regulators are sometimes accused of being professional scolds whose
greatest joy comes from pulling the punchbowl off the table just as the
party is getting started. That's not true. We do, however, go to
considerable lengths to hide the vodka bottle, so that the economy
doesn't wake up with a giant hangover the next morning.

Incidentally, as Steven Phillips pointed out this morning, the economy
[has]{.underline} begun to slow, credit quality problems
[are]{.underline} increasing, loan loss provisions [are]{.underline}
rising, and bank earnings are starting to suffer as a result. But I
won't say we told you so.

Of course, not all banks have been affected equally by these
developments. Coach Paterno wouldn't be surprised to learn that those
who have [prepared]{.underline} for a softening economy are those most
likely to be weathering it successfully so far. And what we see, with
remarkable consistency, is that the banks that are continuing to thrive
in these uncertain economic times \-- banks whose portfolios are holding
up best \-- happen to be the banks that are blessed with strong,
professional, and independent boards of directors.

Fortunately, it's not too late for banks that have fallen behind in
their preparations to get back on track, so that, come what may, they,
too, can find a place in the winners circle.

And we're doing all we can to help.

That's why the OCC has put together what we're calling the National Bank
Director's toolkit \-- a set of publications that explain the
responsibilities of bankers to their directors and the responsibility of
directors to their institutions. Every national bank should have already
received two of these kits, and additional sets can be ordered.

Here's what the toolkit looks like, and here's what it holds. The
centerpiece of the toolkit is the OCC's [Director's Book]{.underline}
\-- a book that no one who serves on a bank board should be without.

It contains general concepts and standards for the safe and sound
operation of a bank and summarizes various laws and regulations of which
directors should be aware. It explains the board's role in managing
risk, in dealing with the OCC and other regulators, and addresses in
broad terms the duties of the individual director.

These duties include:

• Keeping informed of the bank's operating environment

• Hiring and retaining competent management

• Maintaining an appropriate board structure

• Ensuring that the bank serves its community's credit needs

• Monitoring operations, and

• Overseeing business performance

Many directors have told us that these last two responsibilities \--
monitoring operations and overseeing business performance \-- are the
most challenging of all. Maybe that wouldn't have been the case a couple
of decades ago, when community banking was a pretty simple business. But
it isn't any longer.

As Mike Brosnan discussed, risk has grown exponentially in magnitude and
complexity, and it's the responsibility of directors who may lack
specialized financial skills to understand its impact \-- prospectively
\-- on a community bank's safety and soundness.

We understand that many directors need help in performing that portion
of their fiduciary responsibilities, which is why we've included in the
toolkit a booklet entitled [Red Flags in Board Reports: A Guide for
Directors.]{.underline} It tells directors what to look for as they
review the reports provided by management \-- and what ratios or trends
ought to trigger further investigation. We believe it's so important
that directors have these benchmarks at their fingertips that we've
summarized the [Red Flags]{.underline} in a \"Pocket Guide\" \-- another
feature of the toolkit. A copy of the Pocket Guide has been packed into
your conference materials.

But I don't want to leave you with the impression that you have to be a
technical expert to fulfill your responsibilities as a director. We
don't expect directors to be auditors, credit experts, or banking
attorneys. Of course, if you are, so much the better! But that would
just be icing on the cake.

No \-- what the job of director calls for fundamentally are bright
generalists \-- people with good common sense, solid business instincts,
and unflinching integrity. What it calls for are people who know how to
ask the right questions, who bring a healthy skepticism to the answers,
and who set a tone of accountability up and down the organization. It's
not so important that you have technical expertise yourself, as long as
you know how to recruit and retain the people who do.

The first responsibility of a director, then, is to establish a control
environment conducive to safe and sound business operations. What goes
into a positive control environment is discussed in the fourth and final
component of the Director's toolkit, a booklet entitled [Internal
Controls: A Guide for Directors]{.underline}, which you also have in
your conference packet. The booklet talks about many of the things I've
mentioned already \-- a commitment to competence and ethical behavior,
clear assignment of authority, effective oversight, and open
communications \-- as parts of an effective control environment.

Time and again, we've found that this kind of broad, conscientious
oversight is what makes the crucial difference between a well-run
institution and a weak one. If a strong control environment exists,
under a strong board, then much of the rest will fall into place.

That's why the OCC places so much supervisory emphasis on a bank's
internal controls.

This afternoon, Bill Morris, from the OCC's core policy development
unit, will discuss the subject in greater detail. And in three weeks,
the OCC will hold a telephone seminar on audit and internal controls for
community banks. Some of our leading experts will examine the components
of an effective audit and internal control program, explain OCC policies
and practices on the subject, and answer your questions. It should be an
informative event, and I encourage you to sign up for it.

What I've tried to do today is to give you a broad overview of the
challenges and opportunities that lie ahead for community banks \-- and
what it's going to take for you, as national bank managers and
directors, to succeed in today's dynamic financial environment.

If there's one message I'd like you to take back with you, it's that
you're not in it alone. The OCC stands committed to continuing the
dialogue with national banks and to providing supervisory guidance that
helps you achieve your goals. With today's conference, I believe we've
taken another step in that direction.