Remarks by

John D. Hawke, Jr.

Comptroller of the Currency

Before the

American Bankers Association

Washington, D.C.

September 17, 2000

Let me extend a personal note of welcome to Washington to the members of
the American Bankers Association. I think it's important for our
nation's bankers to assemble periodically in the nation's capital \--
not because this is the seat of all wisdom, to be sure, but because of
the critically important relationship that we in government have with
your industry.

Indeed, I can think of no industry that's borne a heavier burden of
government involvement than banking. And although last year's landmark
financial modernization legislation unshackles banks from many of the
constraints of the past, the industry cannot be assured that tomorrow
won't bring other burdens and impositions, enacted to achieve various
public policy goals.

As professional bank supervisors, we're always looking for ways to make
our supervision more effective and less burdensome. The effort can be
summed up in terms of two fundamental challenges: first, how do we
balance our responsibility under the law for ensuring the safety and
soundness of the banking system, on the one hand, with the burdens of
supervision on the other \-- burdens that, if not carefully contained,
can actually [undermine]{.underline} safety and soundness?

I'm speaking now not only of the direct burdens of supervision \-- the
need to comply with a plethora of detailed regulations, and the intimate
involvement in your business of platoons of bank examiners \-- but also
of the opportunity costs imposed by time-consuming procedural and
paperwork requirements.

Few would deny that the burdens of supervision have contributed to the
erosion of the banking industry's market share and competitive strength
over the years. Although regulatory authorities on the state and federal
levels have made tremendous strides in adding value to their
supervision, I've long wished we could do more to tip the balance
decisively into the plus column, so that we can all feel comfortable in
the conviction that the benefits of supervision for banks outweigh the
burdens.

Now, perhaps, with some of the new tools we've developed \-- tools that
I want to talk to you about this morning \-- we finally can do just
that.

The second challenge that supervisors have faced from the earliest days
is one that's common to the human condition \-- divining the future.
Since the beginning of recorded time, we've read tea leaves, consulted
the stars, and paid tribute to those who claimed some special gift of
prescience about future risks and opportunities. In ancient times,
oracles sacrificed a goat and sifted the entrails in search of clues to
the future. In more recent times, coal miners used canaries, housed in
cages fitted to their helmets. When the sensitive birds dropped from
their perches due to lack of oxygen, the miners knew that danger lay
ahead and that it was time to evacuate the shaft. We have long wished
for an instrument of comparable reliability and predictive power in
identifying the potential dangers in our banks, so that we can react to
rising risk before it becomes too deeply embedded.

Now, perhaps, we may be able to achieve that goal.

It would be presumptuous to suggest that we've finally lain to rest the
longstanding supervisory dilemmas I've just described. But revolutions
in practice can and do occur. And I believe that we're witnessing just
such a revolution today \-- one that will go a long way toward improving
the cost-benefit ratio of supervision, reducing burden, and enhancing
our ability to anticipate and control risk in the banking system.

It's part of the larger revolution in technology that's sweeping \-- and
transforming \-- the globe. It's been underway for quite some time, and
we in the regulatory community have long embraced its benefits. The OCC
has been a government leader in automating its procedures, helping our
examiners to work more effectively. But only recently have we been able
to exploit the promise of the technology revolution in a way that
provides material benefits for [bankers]{.underline}.

A year ago, for example, the OCC unveiled National BankNet \-- an
extranet web site available exclusively to national bankers, which will,
I believe, revolutionize the way supervisors and bankers communicate
with one another. The first BankNet application, Comparative Analysis
Reporting, or CAR, was quickly adopted by hundreds of national bankers,
who have used its extensive database to generate reports on how their
performance compares with that of their local, national, and regional
peers. Based on the feedback we've received, we've updated and refined
CAR, to make it more comprehensive and user-friendly. For example, users
can now access total asset information on each bank and run comparative
reports for different time periods.

But as we promised last year, CAR was just the beginning of what BankNet
would have to offer. The brochure you found on your chair this morning
provides more information on our recent enhancements to BankNet, and I
would urge you to visit the OCC booth for a personal demonstration. I
believe you'll be impressed by what you'll see, now and in the coming
months: new analytical models, including early warning benchmarks and
risk-based capital calculators, and new information sources, including
internal OCC reports. It will include legislative and regulatory
analysis, economic and risk updates, "best practices" presentations,
consumer complaint analysis, and other national bank-specific
information \-- all designed to help you function more effectively in
today's competitive financial services environment.

Other BankNet modules will drastically cut the processing time for
corporate applications and produce big reductions in regulatory
paperwork. Early next year, all national banks will be able to prepare
branch and relocation applications on line, and submit them
electronically. Not only will national banks save countless hours in the
filing process; it will lead to significant economies and ensure greater
consistency and responsiveness in our licensing decisions.

Over the next few years, in fact, I anticipate that the majority of
routine transactions between the OCC and national banks will be capable
of being conducted electronically \-- and securely \-- over BankNet.
Examiners will exchange pre- and post-exam information and quarterly
data with bankers on-line. Assessments and fees will be billed and
remitted electronically. Bankers will have the opportunity to file
electronic comments on regulatory proposals.

And the future holds stills greater promise. The day is near when I and
other OCC officials will be meeting with national bankers on line \-- to
update you on regulatory developments, explain our policies, and answer
your questions. As national bankers, you'll have access to our on-line
staff directory, to help you identify the individual responsible for
your area of concern. And when you [have]{.underline} concerns \-- with
an application, a ruling, or an interpretation \-- or when you need help
picking your way through the regulatory thicket \-- we'll be available,
with a few keystrokes, to provide help and advice.

Bank supervision has never been like this before. Clearly, it will never
be the same again. And that's all to the good.

Touting the value of technology to an audience of bankers is surely
preaching to the choir. Yet your experience \-- and ours \-- argues for
considerable care in the way we apply technology and assess its
benefits. Even as we embrace technology, as your conference's theme
says, we must work to "preserve trust." For banks, that means meeting
customers' expectations for service and privacy. We know that bankers
who have fallen short of these expectations \-- for example, by forcing
customers to deal with machines when they would have preferred to talk
to bank employees \-- later regretted it. Not only did they suffer in
the marketplace; they became lightning rods for public criticism and
even legislative action. For banks, preserving trust means maintaining
consistently high standards of customer responsiveness.

For bank supervisors, preserving trust has different connotations.
Supervision is not just about statistics. Sometimes the numbers don't
tell the whole story \-- or the true story, for that matter. No matter
how sophisticated our automated systems are today or how advanced they
may become, understanding a bank's true condition requires an examiner's
insight and intuition. There's no substitute for the constructive
interaction between bankers and examiners that can only take place
across a table, face-to-face. Judging by what we hear from you about the
value you place in the examiner's presence \-\-- especially in smaller
banks \-- it's clear you wouldn't have it any other way. And neither
would we. The knowledge and experience of the national bank examiner
will always be the foundation of OCC supervision.

Making full use of the examiners' skill and judgment is the way that
[we]{.underline} "preserve trust."

Clearly, however, technology has a big and growing role to play in
advancing the science of supervision \-- in making it more valuable and
less burdensome today, in the ways I've already discussed, and better
able to anticipate tomorrow's risks.

We don't use canaries anymore to alert us to environmental hazards. But
OCC's Project Canary serves the same purpose in the banking environment.
It's the name we've adopted for the OCC's core set of early warning
tools \-- a package designed to enhance our identification of \-- and
ability to respond to \-- emerging risks.

Canary gives us what no bank supervisor has ever had available before: a
focused, concise, and technologically advanced early warning system that
will allow us to zero in on those banks that have the greatest amount of
financial risk and the greatest possibility of problems.

One of Canary's most important components is the system of benchmarks
we've developed to serve as a kind of early warning tripwire. Let me
give you an example of what the benchmarks tell us and what role we
expect them to play in our overall supervision.

The current set of benchmarks consists of 15 financial ratios and
measures. At present, six relate to credit risk; four to interest rate
risk; and five more to liquidity. By extrapolating from our supervisory
experience, we've established a threshold in each case that represents
the point at which we've found that risk tends to rise. For example,
experience teaches us that credit quality problems often increase when a
bank's loan-to-asset ratio exceeds 70 percent. So that's where we've
pegged that particular benchmark.

The finding that a bank has exceeded one or more of the Canary
benchmarks will not trigger automatic supervisory action against the
bank or anything of the sort. It goes without saying that not all banks
whose loans to assets exceed 70 percent become troubled banks. The
benchmark is simply designed to alert us to banks with a pronounced risk
appetite in that area, so that we can allocate sufficient supervisory
resources to probe more deeply. For a bank with loans to assets greater
than 70 percent, for example, we would go on to evaluate the composition
of the loan portfolio, the quality of the bank's risk management
systems, and other related factors. Only if our concerns were borne out
by this more intensive analysis of multiple risk factors would we
consider taking supervisory action against the bank. But we'd be in a
position to do it [before]{.underline} the bank's safety and soundness
were significantly impaired.

It's important to note that the number of benchmarks, their distribution
among risk categories, and the established thresholds are not fixed in
stone. Canary is meant to be a dynamic system that will constantly
evolve to reflect changing circumstances and improvements in our
understanding of risk.

Individually, the Canary benchmarks may be more suggestive than
conclusive about a bank's risk profile. But they unquestionably
correlate with the likelihood of problems. Used judiciously and in
combination, they point us to banks with higher than average risk
appetites. Certainly they will help us allocate supervisory resources
more effectively, ensuring that only those national banks that really
need it receive high level supervisory attention. That means less
supervisory burden on those institutions that don't.

As excited as we are about Canary and the benefits we expect it to
deliver, we also recognize what it can never do \-- and what it was
never intended to do. What I said earlier about BankNet also holds true
for Canary. These systems are meant to augment, rather than replace, the
work that OCC's highly skilled examiners do day in and day out at each
and every national bank. Although we're dedicated to continuous
refinement of state-of-the-art technology to enhance the value of our
supervision, our commitment to the support and development of the best
bank examiners in the world is first and foremost.

We're also committed to ensuring that our examiners make the best use of
their time \-- and yours. Burden reduction is and always will be one of
our top priorities. That's why we're working hard to find ways of
improving coordination among the Federal banking agencies, to minimize
needless duplication and overlap and complexity.

Clearly, we've only scratched the surface with respect to what
technology can contribute to easing supervisory burden. At the OCC,
we're hard at work in the early phases of a project that I call
Examination in the 21^st^ Century \-- a project that looks to the day
when examiners will have on-line, real time access to all of the
information they need to perform the supervisory function. No longer
will it be necessary for bank employees to compile vast stacks of paper
for examiner scrutiny, or for bank duplicating machines to churn out
multiple copies of those records for the examiners' use. Our examiners
will be able to sit at computer terminals at their duty stations and do
the analytical work that needs to be done before meeting with bank
management. To be sure, many technical and legal issues will need to be
resolved before this vision becomes reality, and we will need to work
closely with you to make sure that we are jointly using the new
technology in the most productive and least burdensome way possible. But
I believe that the vision of on-line, real time access to bank
information holds the potential to further transform the supervisory
process \-- to reduce the burdens on you and to ensure that the time of
our examiners is spent productively and well.

Sometimes small changes can produce dramatic results. I believe that
even a marginal improvement in the comparative burdens and benefits of
supervision can and will make a big difference in the health and
competitiveness of the banking industry. That's the premise that's been
driving the supervisory innovations I've discussed with you this
morning. By leveraging the expertise we've been building at the OCC for
more than a century, technology will enable us to better serve you, just
as it enables you to better serve [your]{.underline} customers.