# O **NEWS RELEASE**

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| ## Comptroller of the Currency      | ##### NR 2002-76               |
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| Administrator of National Banks     |                                |
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FOR IMMEDIATE RELEASE Contact: Robert M. Garsson

September 23, 2002 (202) 874-5770

Remarks by

John D. Hawke, Jr.

Comptroller of the Currency

Before the

Independent Bankers Association of Texas

San Antonio, Texas

September 23, 2002

I'm sure that IBAT was as relieved as any group in America when we heard
the announcement that the players' union and the major league baseball
owners had reached a settlement in their labor dispute. After all the
work that had gone into developing this year's conference theme, it
would have been a real pity had it come to stand as nothing more than a
reminder that the national pastime had shut down for the season,
disappointing millions of fans and putting thousands of people out of
work. Thankfully, the games continue, the playoffs and the World Series
loom, and I'm pleased to be joining IBAT once again, at its own annual
fall classic.

As we contemplated the possibility of a baseball strike, I heard plenty
of speculation that another strike might spell the demise of baseball as
we know it -- that this time, the fans might cast the final vote with
their feet. Frankly, I never thought there was much chance of that
happening. Despite the economic challenges that the game faces, it's
always been part of our national identity.

Of course, people once said the same thing about cock fighting, corn
husking, and minstrel shows -- once popular pursuits that no one pursues
any more. It reminds us tastes and habits change \-- that nothing is
forever.

The question that has been much discussed of late is whether community
banking will share in the fate of other venerable institutions overtaken
by time and events -- or whether it can marshal the endurance,
adaptability, and political support necessary to avoid such a fate.

Certainly there's no shortage of pessimists about the future of
community banking -- and little dispute about some of the particulars of
their basic argument. Community banks are disappearing at an alarming
rate -- nearly one a day, on average. Some have fallen to merger and
acquisition, while others have succumbed to weak fundamentals, such as
shrinking loan margins, a consumer mentality that focuses on small
differences in price to the exclusion of all other considerations, and,
above all, the absence of the economies of scale that might otherwise
make the numbers work.

Let me give you an example I can speak to with some authority. In terms
of your overall expenses, the cost of regulatory compliance ranks pretty
far down the list. At least I hope it does. But it's a conspicuous cost
because -- to be frank about it -- it's a cost whose benefits aren't
always obvious.

Year after year our friends in Congress add new mandates for consumer
protection, community service, and more, and expect the regulators to
enforce them. But the costs all come back to you, in the form of the
people you have to pay to do the extra legwork and paperwork the law
requires, and in the form of the supervisory assessments you have to pay
[us]{.underline} so that our examiners can certify that you're in
compliance with the law.

Big banks don't like this any better than small ones do. They just don't
seem to feel it as much.

Community banks [are]{.underline} feeling these pressures more than ever
before, partly because they are more exposed to big bank competition
than ever before. There are no sheltered markets anymore \-- only places
your competitors have chosen not to go. The advent of true nationwide
branching is one manifestation of that; improvements in technology,
which brings remote delivery of financial services within reach of
millions, is another; and the removal of statutory prohibitions on the
types of products and services that integrated financial institutions
can offer is a third. Together, these market and regulatory changes add
up to what is probably the most challenging competitive environment for
community banking in decades.

A cursory look at the numbers here in Texas -- one of the nation's
traditional strongholds of community banking \-- seems to support what
the analysts say about the unstoppable momentum of financial services
consolidation and community bank evaporation. In 1998, there were 798
commercial banks in operation statewide. As of the middle of this year,
the number was down to 675 -- a drop of nearly 15 percent. Roughly
13,000 fewer people work in Texas banking today than four years ago.
Some of those same people might have once worked for you.

But to me the remarkable thing is not that there's been some contraction
in the banking industry. Given the number of banks with which we began,
contraction was a foregone conclusion, especially in a softening
economy. And the Texas economy, while no softer than most, has been
affected by a variety of circumstances unique to it. I'm speaking now of
the state's heavy reliance on agriculture, which has been buffeted by
drought and low commodity prices; weakness in the Mexican economy, to
which the state's fortunes are so closely linked; and fallout from the
collapse of Enron and related businesses.

In light of these bumps and bruises, I think we should be focusing on a
different set of numbers -- the actual performance and condition ratios
of Texas banks. They tell a story of resilience and underlying strength
\-- notwithstanding the dire pronouncements of the industry analysts.

Consider [these]{.underline} 2001 numbers, using 1998 -- a strong growth
year \-- as a comparative benchmark. Return on equity, up. Return on
assets, up. Net charge-offs, down. Capital, up. Noncurrent loans, down.

And the outlook for the near term is equally positive. Many of you have
reported a recent surge in retail deposits, as individual investors seek
sanctuary from the turbulence on Wall Street in banks on Main Street.
Coupled with rising loan demand, which seems likely as the national
recovery gains speed, community banks in Texas and throughout the
country may be poised to realize major gains to the bottom line.

Some would have you believe that community bankers have done nothing
more than to prove the importance of good timing, suggesting that you've
been accidental beneficiaries of trends you've had no hand in shaping. I
don't share that view. I believe, rather, (and the numbers confirm
this), that the community bank business model, with its emphasis on
personal service, is fundamentally sound. I believe that the skill that
bankers like you have brought to the business has been instrumental in
proving the so-called experts wrong -- at least so far. Most of all, I
believe that the role you play in the markets you serve is crucial to
the health of our communities and to the national economy. Your ability
to react quickly and rationally to local credit needs, to price fairly,
and to provide customers with a wide range of banking and related
financial products, is indispensable -- and irreplaceable.

I should hasten to add that while all of these factors have played a
role in your past success, none of it guarantees that this success will
continue. As I've said, peoples' habits do change \-- whether it's the
games they watch and play or the way they save and invest.

In my view, the value you contribute is too important to be left to
chance or to the sometimes-merciless whims of the marketplace. So I
believe that the regulatory and legislative policies of our government
must explicitly embrace the interests of community banks -- much as we
have embraced the interests of family farms or small business generally
\-- as a matter of fundamental national importance. Without taking
anything away from your great skills as bank managers, I am convinced
that such an embrace is crucial to the continued success -- and
long-term survival -- of our nation's community banking sector.

I am not in any way implying that the interests of community banks
should prevail at the expense of large banks. Big banks make their own
outsized contribution to America's international competitiveness and
economic health. Supporting one sector on an industry is not equivalent
to oppressing another. The goal of economic regulation, after all, is to
achieve the appropriate parity between efficiency and equity -- a goal
that's consistent with recognition of the fact that our supervisory and
regulatory policies have disproportionate impact on the well being of
community banks.

Some may accuse the OCC of being a latecomer to this view. There seems
to be a notion out there -- and it's nothing new \-- that we're "the big
bank regulator," and that we're less attuned to the needs and concerns
of community banks than, say, our colleagues at the state banking
departments and at the FDIC. But let me ask you this: can we be
accurately referred to as the "big bank regulator" when nearly 2000 of
the 2300 national banks that we're responsible for are community banks
with assets under \$1 billion? And half of [that]{.underline} number --
1000 national banks -- holds less than \$100 million in assets.

And is it fair to characterize the OCC as indifferent to the needs of
community banks when more than 1300 of our examiners -- nearly 80
percent of the OCC's total examination force -- is dedicated to
community bank supervision? I'm referring to 1300 highly trained
professionals, men and women who are widely acknowledged to be the very
best in the business at what they do. Most of them have deep roots in
the communities whose banks they serve.

I should add that we restructured our procedures several years ago so
that those same local examiners and front-line supervisors -- we call
them Assistant Deputy Comptrollers \-- make 90 percent of the decisions
that affect your institutions. That move was designed to take advantage
of the depth of experience -- averaging more than 20 years -- possessed
by our ADCs.

I don't think we can fairly be accused of being unresponsive to the
banks we supervise when, in 2001 alone, the OCC sponsored nearly 200
outreach events around the country -- a number that doesn't include the
many events sponsored by others that we attend or the dozens of meetings
that we hold with state banking associations delegations when they come
to Washington. I was pleased to welcome Chris, Steve, and a large IBAT
delegation to our offices just a few months ago, and look forward to
welcoming you back. Let me assure you that there will always be an open
door -- and a warm spot in our hearts -- for IBAT at the OCC.

In our case, numbers alone -- number of smaller banks that we supervise
and the number of examiners assigned to them \-- tell only part of the
story of our commitment to the health of community banking. It's
reflected in our whole approach to supervision, which draws on
procedures formulated especially for community banks. These procedures
take a risk-focused approach that allows for streamlined, efficient
examinations. We focus on practices and outcomes -- an approach designed
to get examiners in and out of your bank as quickly as possible with the
information that they need to provide effective supervision.

Our commitment to community banks is also reflected in our sensitivity
to regulatory burden -- and an appreciation of how profoundly community
banks can be affected by it. Today we don't issue a regulation without
first conducting a community bank impact analysis. Where we find that
the costs of a given regulation to community banks is out of proportion
to the benefits that regulation is likely to bring to the industry and
the public we'll step back and reconsider it.

Technology offers tremendous potential for reducing regulatory burden,
and we're aggressively exploring possible ways to automate supervisory
communications and the examination process itself. I believe that the
day is not far off when most of the exchanges between bankers and
regulators will take place through systems like the OCC's National
BankNet. Before much longer you'll be able to comment on proposed
regulations, pay your regulatory assessment, and file corporate
applications -- all online.

And we're working to give examiners the ability to perform even more of
their routine supervisory duties remotely. That will mean fewer burdens
on you -- less staff time preparing for exams, less time producing
paperwork, and a less intrusive examiner presence on-site.

Burden reduction was an important consideration behind the adoption of
our Canary early warning system -- a system that, as many of you have
heard, is designed to enhance our ability to identify and respond to
emerging risks. Canary enables us to zero in on those banks that have
the greatest amount of financial risk and the greatest possibility of
problems. By the same token, it also enables us to avoid imposing undue
burden on well-managed institutions. If your bank is one of those -- and
the vast majority of community banks fall squarely into the well-managed
category -- Canary can result in real reductions in regulatory burden.

But I can assure you that whether yours is a troubled institution, a
problem-free institution, or something in between, your examiner will be
there for you. No matter how much technology enables us to conduct
supervision remotely, an on-site presence will always be a central
component of the supervisory relationship.

Many bankers prize that relationship. They tell me that they use our
examiners like all-purpose consultants \-- and for good reason, because
in the ranks of OCC examiners are men and women whose expertise on a
whole range of banking subjects is recognized throughout the nation and
around the world. I know that some banks opt for a national charter
precisely because the organizers know they can count on expertise
furnished by our examiners to help them make it through the
always-challenging start-up period.

But community banks that are also national banks pay for the privilege
-- and pay more than they should have to, in my judgment. The unfair
financial burden that you bear is the result of what I believe is a
serious flaw in our whole system of bank supervision. Although the OCC
assessment schedule is progressive \-- that is, large national banks pay
more than their pro rata share of the costs of their supervision \-- the
assessments you pay as national banks are still considerably higher than
you'd be paying under a state charter. You know this, and so do we.

This fee disparity is the result of a system under which the Federal
Reserve and the FDIC provide the federal supervision of state-chartered
banks -- indeed, they perform for state banks virtually every function
we perform for national banks \-- but they don't charge those banks for
their services. Instead, the resources used by the FDIC for this purpose
are provided in large part by [national]{.underline} banks, which
account for more than half of the balance in the Bank Insurance Fund. In
other words, national banks are effectively subsidizing the supervision
of your state bank competitors.

And because the states themselves actually provide only a small part of
the total supervision their banks require, the states can afford to
charge less \-- much less \-- than a comparable national bank pays to
the OCC, which provides [all]{.underline} of its supervision.

We believe that this arrangement is patently unfair to national banks
and harmful to the dual banking system, and I have repeatedly urged
Congress to address this issue in the context of deposit insurance
reform. Everyone agrees that banks should contribute to the insurance
funds based on the risks they present, and that healthy banks should not
be required to bear the costs and risks of providing deposit insurance
to poorly managed institutions. We strongly believe that the same
principle of equity should apply to supervisory assessments as well, and
that the fee disparity between national and state banks should be
eliminated.

Let me emphasize that the OCC is not proposing \-- and never has, as
long as I've been Comptroller -- that the fee disparity problem be
resolved by charging additional fees to state banks. Our proposed
solution, which would draw on FDIC revenues to fund [all]{.underline}
supervision, would benefit state banks every bit as much as national
banks.

Our commitment to community banks is also reflected in OCC policies
designed to assist national banks in keeping up with the demands of a
highly competitive financial marketplace. For example, we launched a
pilot program that allows national banks with the highest supervisory
ratings to exceed the customary 15 percent limit on loans to a single
borrower where the limit is higher for state-chartered institutions. It
was designed exclusively for community banks, which may now be in a
position to compete favorably for larger borrowers who previously had to
go elsewhere to meet their financing needs.

It's just another way that the OCC has "stepped up to the plate" to
support the interests of community banks.

I opened my remarks by suggesting that the coming years would be
decisive ones for community banks \-- and for the organizations, like
IBAT, that speak for them. In that vein, let me offer one final thought.
While regulatory sensitivity to community banking's unique needs is
important, the future of community banking in America will not be
determined by government action \-- or inaction. All the government
support in the world won't be enough if your customers feel ill served
or inadequately served banking with you. They will regret it if they
have to go elsewhere to have their financial needs well and
comprehensively met, but most of them will go nonetheless. The challenge
for community bankers is to help your customers make the decision that's
right for them -- and right for you.

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  The OCC charters, regulates and examines approximately 2,200 national
  banks and 52 federal branches of foreign banks in the U.S., accounting
  for more than 54 percent of the nation's banking assets. Its mission is
  to ensure a safe and sound and competitive national banking system that
  supports the citizens, communities and economy of the United States.
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