Remarks by

John D. Hawke, Jr.

Comptroller of the Currency

Before the

National Association for Business Economics

Washington, D.C

March 25, 2002

There's a new realism in our thinking about the global economy. We now
have a keener awareness of the special security challenges \-- as well
as the more familiar political and financial challenges \-\-- that
internationally active businesses have to contend with.

This awareness has been forced on us by recent events. The world is a
different place today from six months ago. It may stay that way. And
that means adjustment \-- by all parties \-- to the realities of the new
international environment.

By arranging this timely conference on the new uncertainties of the
global economy, the NABE has materially contributed to this cause. I
congratulate you \-- and I thank you for the opportunity to be here with
you today.

This more balanced, more cautious, perspective on the global economy is
an enormously positive development. To the extent that it contributes to
a better deployment of our finite stock of human and financial assets, I
believe it bodes well for the future of international trade and
investment \-- and therefore for our collective well being.

Let me go further and suggest that the most commonly cited benefits of
globalization \-- new markets, access to innovation, comparative
advantage and specialization \-- are not the [only]{.underline}
important benefits that globalization has brought us.

I am not by any means discounting the importance of the bottom line \--
probably the second most powerful animating force known to mankind. But
I do believe that we\'re profiting from the global convergence of
financial practice \-- and a similar convergence in financial oversight
and supervision \-- in other ways that have little to do directly with
dollars or deutschmarks. Convergence has given us a wider range of
experiences on which to draw \-- and from which to learn

As U.S. bank supervisors, we\'re intensely interested in the experiences
of our supervisory colleagues around the world. We work closely with
them, both bilaterally and through the Basel Committee on Banking
Supervision. It\'s part of our ongoing effort to raise bank supervisory
standards and practice \-- and to bring them into greater harmony among
both the advanced nations of the world and the world\'s emerging
economies.

In the U.S., our interest in the structure and operations of bank
supervision in other nations isn\'t simply a matter of professional
curiosity; it goes deeper than that. For more than a century, the
structure of bank supervision in the United States has been a
controversial subject. And although U.S. lawmakers have frequently
tinkered with that structure, it\'s resisted fundamental change.

As someone who has spent the better part of a long career working within
that structure, I confess to a certain affection for it, in all of its
convoluted glory. Moreover, the system works quite well and the various
players have learned how to live with it.

But there are some who think that it\'s not enough that a system works
in practice. They believe it should work in theory as well \-- and our
bank supervisory structure probably fails that test. It\'s not uncommon
for those who have not lived within the present system to view it with
chagrin on first exposure. Understandably, it presents an inviting
target for rationalization and restructuring.

What the structure of bank supervision in the United States would look
like if we were designing it from scratch is an interesting and
provocative subject for those of us involved in the supervisory process.

But it\'s not the subject I\'ll be addressing today. There\'s no reason
to bog you down in the arcane politics of bank supervision and
regulation, or in the details of how our system compares with those in
other countries.

Indeed, one of the lessons we have already learned from the Basel
Committee\'s work on a new international capital accord is that it\'s
very difficult to find common institutional arrangements suitable for
all countries at all times.

This shouldn\'t come as a surprise. Institutions spring uniquely from a
country\'s culture and history. Whatever else one might say about the
U.S. supervisory structure, which has emerged largely through historical
accident, it\'s come to reflect distinctively American values and habits
\-- suspicion of authority (especially centralized authority),
competition, and egalitarianism.

The structure of our banking system is also uniquely and authentically
American. We would not graft our model onto another country and expect
it to work, just as we might find that any particular foreign model
might fail to gain acceptance here. I think that most Basel Committee
members would agree that the range of national practices in financial
services and supervision worldwide is [too]{.underline} wide to be
accommodated within a single uniform framework.

But where the Basel Committee [has]{.underline} been quite successful
\-- in its previous work as well as its current work \-- has been in
identifying common [principles]{.underline} of effective supervision and
leaving it to each nation to decide how those principles should be
implemented.

One such principle emerges with striking frequency and clarity from the
recent history of financial crisis in countries around the world. Nearly
every crisis we examine, no matter where it occurred, provides a
reminder of the dangers of politicizing the banking system and its
supervision.

We see such interference taking various forms. Central governments may
compel banks to make loans in defiance of good credit practices in order
to promote certain policy goals, such as protecting inefficient
industries. Governments may take an ownership interest in the banking
system to facilitate such policies. In some cases, government pressure
has forced financial institutions to lend to weakened, but politically
powerful, companies or industries.

Pressure may be exerted on supervisory authorities to forbear, or \"look
the other way,\" when a bank\'s condition has deteriorated and
supervisory action would be warranted. In some cases, court decisions,
legislative action, or other informal influences have undermined
supervisors. Where supervisors are removed from office without cause \--
and appointed to office without regard to their professional competence
\-- the quality of bank supervision inevitably suffers.

But though the means may vary, using the banking system to advance a
political agenda rarely succeeds in the long run. Where short-term
expediency is given primary weight, the safety and soundness of
financial institutions is frequently undermined. And when that happens,
the banking system\'s ability to support an economy\'s growth and well
being is surely compromised.

I believe that the evidence of specific national cases bears this out.

In some respects, Argentina stands as a textbook example of the dangers
of politicizing the banking system, because the consequences there have
been so sudden and dramatic. What had been South America\'s breadbasket
\-- and one of its most vibrant economies \-- is now an economic basket
case, suffering high and rising unemployment and remote prospects for
recovery any time soon.

Although a great many factors contributed to the country's decline, it
can be argued that Argentina\'s downfall was sealed in late 2000 with
the launching of a series of official actions that had the effect of
crippling the nation\'s banking system. Banks, as well as pension funds,
were pressured into relaxing their limits on holding government debt. A
committed safety-and-soundness advocate was ousted from his position as
governor of the central bank.

The banking system itself was pushed to the brink of insolvency when the
government asymmetrically \"pesofied\" dollar-denominated bank deposits
and assets, a move that decimated bank capital. And the imposition of
deposit withdrawal limitations destroyed what little public confidence
remained in the system. As a result of the country\'s liquidity crisis,
new loans that might help revive the economy are difficult to come by
and Argentina\'s downslide continues \-- regrettably with no end in
sight. It will take many years for the banking system to recover.

Japan\'s economic problems have also been well chronicled, and the role
of a weakened banking system in aggravating those problems is well
documented. Not as well recognized is the role played by Japanese bank
supervisors, then directed by the ministry of finance, in keeping
insolvent institutions afloat.

Reluctant to take action against these institutions, Japanese regulators
allowed them to bleed slowly, draining resources that might have aided
the country\'s recovery. A new unified Financial Services Agency,
responsible to the prime minister\'s office, was created to correct the
problem. But in part because the habits of regulatory paternalism and
opaqueness are proving hard to eradicate, stagnation continues to
characterize Japan\'s economy.

South Korea offers another illuminating primer on how even well
intentioned government actions can undermine a banking system\'s safety
and soundness. Among the fundamental weaknesses in the Korean banking
system as late as the mid-1990s was the truly massive scale of the Seoul
government\'s directed lending program. For years, industries earmarked
for support in its export-oriented economy received
government-subsidized loans, among many other things. Bank supervisors,
through lax supervision, had become instruments of this policy of
propping up favored borrowers. Supervisory responsibility was divided
between the central bank and the ministry of finance.

But the quality of South Korean supervision, rather than its structure,
was the biggest problem. Prudential supervision standards were lax.
Banks were not required to undertake in-depth analysis of commercial
borrowers. Loans were repeatedly rolled over without meaningful review
of the borrowers\' abilities to repay. Regulatory limits on
concentrations of credit to a single borrower were loose, and they were
widely suspended in dealing with favored borrowers. Banks were permitted
to grow without adequate risk management safeguards.

When the South Korean economy crashed in 1998, the banking system led
the way down. Wisely, the Seoul government recognized the role that
inadequate supervision had played in the debacle, and in that year, it
undertook a comprehensive restructuring of the country\'s oversight of
financial institutions. Supervision was consolidated into a single
agency, independent of the government, and prudential regulations have
been brought closer in line with international best practices. At least
part of the credit for South Korea\'s progress toward recovery must go
to its effort to reform its supervisory structure \-- and to the
international donor agencies that encouraged it to act.

South Korea seems to have learned from its experiences. So has Turkey.
Supervisory changes have been an essential part of the reform efforts
initiated by the Turkish authorities over the last several years, and
were among the conditions of the International Monetary Fund\'s 1999 aid
package.

Turkey\'s financial instability has been the result of a combination of
factors, including government interference in the state-owned banks.
These banks have incurred huge losses due to directed lending.
Fragmented, ineffective supervisory oversight was also a factor. But
Turkey is enacting sweeping changes in its national supervision,
including the creation of a new, independent, professional regulatory
body to do the job previously performed by several government entities.
Turkey still faces significant hurdles. But most analysts agree that
while the country has a way to go, it\'s headed in the right direction.

There\'s a final example I\'d like to discuss \-- an example
considerably closer to home. The independence of bank supervision in the
United States itself has often come into question.

It's a question that has a long and difficult history. During the Great
Depression of the 1930s, there was strong sentiment that federal bank
supervisors should take marching orders from their superiors in the
Treasury Department and from the Federal Reserve. Many people thought
that the Comptroller of the Currency should encourage national banks to
make loans to good borrowers and bad borrowers alike, and to look the
other way as credit quality deteriorated.

Given the gravity of that crisis, with the very survival of the U.S.
economy perhaps hanging in the balance, this viewpoint might have been
understandable. But had it prevailed, the result could have been
disastrous for the banking system, for the federal supervisory agencies,
and for the U.S. economy. Fortunately, more sensible heads prevailed,
and the statutory firewalls that were designed to protect our
independence and shield us from improper influences did their job.

That was not the last of it, however. Over the decades, there have been
occasional attempts to draft federal bank examiners into the service of
some larger political or economic strategy. For us that\'s meant
contending with pressures that have arisen from time to time to alter
our supervision in ways that may be expedient \-- but may also be
fundamentally unsound.

The late 1980s and early 1990s, for example, were a time of great stress
in the U.S. banking system and the U.S. economy. The OCC was encouraged
to overlook weaknesses in the balance sheets of some troubled banks in
the hope that the economy would improve and the banks in question would
turn the corner on their own. Some called this watchful waiting; a
better term might have been wishful thinking.

As it turned out, we did no one any favors \-- certainly not the
affected banks \-- by allowing problems to go uncorrected. Losses
mounted, forcing us finally to take precipitous action to deal with what
were by now deeply troubled, if not insolvent, banks. Loans that passed
muster in one examination were severely criticized in the next, as
examiners demanded large additions to loan loss reserves previously
thought adequate \-- with serious consequences for the credibility of
supervisors, among other things.

Many banks failed; bank credit became increasingly difficult to come by,
generating talk -- and it was mostly talk \-- of a "credit crunch"
ostensibly caused by bank supervisors. But it's certainly true that the
banking system's troubles complicated and prolonged the process of
economic recovery a decade ago.

This experience is one that we\'ve been determined to learn from \-- and
never to repeat. It taught us that ignoring or failing to comment on
increasing risk or deteriorating conditions \-- forbearance, to call it
what it is \-- is poor supervision. It reminded us that we serve our
banks best when we forthrightly convey our concerns to bank managers and
encourage them to address changing circumstances.

It caused us to reaffirm our commitment to the proposition that we best
serve the public interest by overseeing the safety and soundness of the
national banking system consistently, predictably, and independently, in
good times and bad. We make our greatest contribution to a sound economy
by assuring that our banks have the capacity to extend credit when
creditworthy loan opportunities are presented.

I believe the results speak for themselves. While there are pockets of
weakness in the banking system today and the possibility of additional
problems ahead, those problems are much less widespread -- and much more
manageable -- than they were at a comparable stage of the last business
cycle.

Capital is high -- twice as high as it was in 1989. As one might expect
after two years of business slowdown, nonperforming assets are up, but
not alarmingly so. Loan loss provisions are adequate, even if not as
conservative as bank examiners might wish. Overall, the industry is
still highly profitable \-- again, no small accomplishment given the
recent condition of the economy.

And here\'s another quite remarkable development. Although the evidence
shows that U.S. banks have gradually been raising their lending
standards -- a positive development, in our opinion -- business credit
is still plentiful -- much more plentiful than at any similar time since
the early 1970s, according to a new FDIC study. So much for credit
crunch allegations \-- which seem to emerge principally from marginal
borrowers whose banks have prudently cut back on their lines.

Perhaps the foremost reason for the improved availability of business
credit is that the banking system has generally remained healthy despite
what was until recently a down economy. And now that loan demand is
poised to pick up again, banks will be in a condition to respond, and
the economy will have the capital it needs in order to resume its upward
growth.

Before we become too totally intoxicated with our own accomplishments,
however, let me offer two quick caveats. First \-- and I can\'t stress
this enough -- it\'s important that we not indulge in premature
celebration over the news from the front, as it were, because conditions
on the battlefield are subject to change. As I said at the outset, the
new global economy undoubtedly has many surprises in store for us in the
months ahead, and any sense of relief and satisfaction we might feel
over the present condition of the banking system must be leavened by a
large measure of caution \-- and humility.

Second, I am not suggesting that bank supervisors deserve all -- or even
most -- of the credit for the banking system\'s current health. Many of
the changes that have taken place over the last decade, and have helped
buffer the industry against hard times, have come from bankers
themselves.

Banks are much more diversified in their product lines and less
concentrated geographically than they were just ten years ago. That
makes them less vulnerable to the kinds of local disturbances that
proved so ruinous to financial institutions during the recession of the
early 1990s. They have recognized the need for strong capital bases.
They have reduced their reliance on volatile interest income, have
diversified their revenue streams, and they have invested in advanced
risk management techniques that make it possible for them to better
measure and manage their risk and thus to limit their exposure to loss.

Bankers too have learned from the last downturn. The historically high
levels of capital in the system today are a reflection of the
experiences of a decade ago, when adequate capital \-- by regulatory
standards \-- turned out in some cases to be wholly inadequate to cover
the actual volume of loan losses. Some bankers vowed that this would
never happen again. And tougher capital regulation reinforced that
lesson for bankers who might have missed it on their own.

Clearly, we have all learned from experience.

Yet one can\'t discount the contribution that bank supervisors have made
to the industry\'s health. Bankers certainly don\'t. Sometimes it\'s as
simple as our taking the blame for a politically awkward decision by a
bank, such as declining a longstanding customer\'s request for a
questionable loan. In that spirit, let me say this to the world: we\'re
happy to serve as any banker\'s scapegoat if it results in a safer and
sounder banking system.

And bankers often express their appreciation to us for helping them
recognize weaknesses and arrange appropriate corrective action.

For example, two years ago we became very concerned about the volume of
\"enterprise value\" lending we were seeing \-- that is, credits whose
repayment depended on the borrower\'s success in realizing projected
cash flows, frequently from start-up ventures. We viewed this as no more
than a very chancy kind of unsecured lending \-- or, perhaps more
accurately, as a kind of equity investment, without any upside.

We knew we were on to something when we heard loan officers refer to
these credits as \"airball\" loans. We heard some carping about our
repeated comments on this subject, but I believe our focus on this
practice served banks well. Just recently, one of the country\'s leading
bankers said to me, somewhat apologetically, \"you guys were absolutely
right about that enterprise value stuff.\"

The past 24 months \-- and the past six months especially \-- have been
a trying time for the American economy and the American people. Yet, in
part because bank supervisors have been resolute in facing the facts and
in addressing problems in the banking system as we saw them developing,
I believe the American people are better off. Because we have been able
to provide not just quality supervision, but independent supervision,
the U.S. banking system is strong today. And thankfully, so is our
nation.