# O **NEWS RELEASE**

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| ## Comptroller of the Currency      | ##### NR 2002- 50              |
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| Administrator of National Banks     |                                |
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FOR IMMEDIATE RELEASE Contact: Robert M. Garsson

June 6, 2002 (202) 874-5770

Remarks by

Mark A. Nishan

Chief of Staff

Office of the Comptroller of the Currency

Before a

Bankers Outreach Meeting

Minneapolis, Minnesota

June 4, 2002

Despite the challenges of an economy in transition, recent years have
been relatively kind to the bottom-line aspects of community banking.
Psychologically, however, they\'ve certainly been a trial.

The industry's status may have hit a new low a few years back when Bill
Gates, the aging Wunderkind of the New Economy, gave an often-quoted
speech claiming that bankers were dinosaurs: lumbering relics about to
be devoured by more nimble competitors.

Since then, of course, the Dotcom meltdown and a few minor complications
involving our antitrust laws have presumably left our friend Mr. Gates
sadder but wiser \-- and perhaps more humble in recognizing his own
analytical limitations.

But Gates has hardly been alone in viewing bankers \-- especially
community bankers \-- as vestiges of the old economy whom time is
quickly passing by.

Indeed, even some careful longtime observers of the banking scene have
issued dire pronouncements about the future for community banks. Their
message can be summed up as follows: "adapt \-- change \-- or die."

And they're not talking about the kind of gradual, incremental change
associated with rolling out a new product or service from time to time.
No. What the critics want you to do \-- what they're insisting you
[must]{.underline} do \-- is to become a miniature version of Citibank
or, better still, Merrill Lynch. That is, be everything to everyone.
Except on a smaller scale.

For a community banker, that kind of talk can definitely be
demoralizing.

Specifically, we hear that community banks are stuck in a downward
spiral of miseries \-- miseries that include scarce core deposits,
shrinking loan margins, and no-such-thing-as customer loyalty. Meanwhile
the costs of doing business never stop rising and they seem to fall
hardest on those most lacking in the essential economies of scale.

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

Year after year our friends in Congress add new mandates for consumer
protection, community service, and more, and order your regulators to
carry them out. But the costs \-- direct or indirect \-- 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 supervisory
assessments you have to pay [us]{.underline} so that we can pay
examiners to check up on you.

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

That's true of many trends in the industry. With costs so high and
spreads so thin, it takes size and volume to be viable. At least that's
what the so-called experts tell us.

I recently heard a community banker say that if he dwelled on all this
and believed everything he was hearing from the analyst crowd, he would
have traded it all in for a life of golf and pina coladas a long time
ago.

I'm reminded of your Minnesota Twins \-- a relatively small market team,
with one of the lowest payrolls in major league baseball. It\'s one of
two teams slated for what\'s euphemistically called \"contraction.\" How
demoralizing that must be \-- to players and fans alike. Yet, last time
I looked, the Twins were at or near the top of their division.

They can\'t compete with the Yankees for the services of the
highest-priced free agents, but they can and have competed in the way
that matters most \-- on the field. What the Twins may lack in resources
they make up for with a strong work ethic and a relentless focus on the
intangible elements of success: leadership, teamwork, and personal
relationships.

The same thing holds true for community bankers competing with larger
banks. On paper, the odds don\'t look so good.

Yet I know of few bankers who are giving up the franchise. Instead, your
numbers are holding strong \-- stronger than anyone would expect given
today's circumstances.

Despite these challenging economic times, there are still a thousand
national banks with less than \$100 million in assets. Over the past 18
months, we issued 52 charters for de novo national banks, despite the
fact that those 18 months were among the most difficult months for our
economy in recent memory.

What's going on here? Is this a case of good old-fashioned American
optimism? (Blind optimism, some would say.) Or do community bankers know
something that the analyst crowd hasn't quite figured out?

As far as I'm concerned, it's no contest. Community bankers simply know
their franchise and its value better than your critics do.

Of course, it's a given that community banks provide personal service.
That's your reason for being. A community bank that doesn't provide a
high level of service is a community bank that probably disappeared a
long time ago \-- with the dinosaurs, if you will.

The question is whether personal service means very much anymore \--
whether it's enough to sustain several thousand banks more or less like
yours. These days, I suspect, most analysts would say no. The very idea
of delivering financial services one on one, person to person, across a
desk seems so . . . well, so Old Economy.

Moreover, there's a consensus in some quarters that, except for a very
few high-strung customers who need a high level of hand holding, most
bank customers don't care much about service \-- or, if they do, they
aren't willing to pay much for it. As for the rest \-- those who insist
on this higher level of personal attention \-- they constitute a
relatively small niche market that can easily be satisfied with many,
many fewer community banks than presently exist.

This is a hard proposition to refute, partly because service is one of
those well-known intangible quantities. We certainly do know that bad
service can turn customers into ex-customers in a big hurry \-- as
demonstrated by the string of multibillion-dollar megamergers that
produced disappointing results for management and investors because, at
least initially, they produced substandard service for customers. When
customers had had enough \-- and it didn't take more than a couple of
botched transactions and PIN numbers that suddenly stopped working \--
these customers took their business elsewhere.

It's certainly true that competition in financial services has made
consumers more price conscious. Who will admit to paying more than you
have to? For most people who earn their money lawfully, price is never
[not]{.underline} an object, regardless of how much money you happen to
have.

I recently read about a community banker who started offering his
customers free checking, only to find the name of one of the bank's
major shareholders on his new account list. That\'s right: it had taken
the lure of free checking to convert a longtime major shareholder \--
who I daresay wouldn't have missed that extra ten or fifteen dollars a
month \-- into a customer.

But I think that's an extreme case. I'm reminded of an [American
Banker]{.underline} headline, talking about the preference for smaller
financial providers, that read, "Small Is Better, Say the Very Rich." I
cannot imagine that the merely rich, the near rich, and the
hope-one-day-to-become rich wouldn\'t agree with that assessment.

Coincidentally, I also see a report by an independent financial
consultant who argues that banks have the edge over traditional
investment advisory firms in competing for the business of high net
worth individuals. So if small is better than large, and banks are
better than the rest, small banks must enjoy the best of all worlds.

The fact is that personal service is something that people increasingly
see as a symbol of their station in life. It used to be that a
chrome-wheeled, big-finned Cadillac in the driveway told your neighbors
you had arrived. Today the badge of status may be more subtle \-- and
less garish. Today, status is more likely to be associated with personal
services, in the form of a gardener or a masseuse \-- or a personal
banker.

It's human nature \-- and it's the nature of our economy. When people
can afford a high level of service, it\'s something they're almost
invariably willing to pay for. And that's good for you as community
bankers.

It's good for you because the demographics are all on your side. The
aging of the baby boom generation is about to produce a bumper crop of
affluent retirees who'll be reaping the harvest of their inheritances,
the appreciation in their homes, and the build-up in their retirement
savings. These are people who'll be ready and able to pay for high
quality financial services, obtained from people they trust. That's
where you come in.

So it's clear that, in important respects, small [is]{.underline}
better. But, as the analysts are quick to point out, it's hard for a
community bank to stay afloat without the aforementioned economies of
scale. So how [do]{.underline} you compensate for the razor-thin
margins, heavy fixed costs, lack of asset diversification, and a narrow
transaction base \-- all the factors that complicate the life of the
community banker?

I have two suggestions.

The first is to aggressively seek out new markets. And you might say,
\"But Mark, the well is dry. There aren\'t any new markets out there.\"
But I\'m not talking about traditional bank customers. I\'m talking
about the people we used to call the unbanked \-- the millions of
Americans who use financial services \-- and pay for financial services
\-- but not generally at a bank.

There are lots of these people out there, and it may be that you\'ve
seen them \-- lined up on payday at the check-cashing shops, or at the
title loan outlets, or at the payday lenders. They\'re paying for
financial services, all right \-- and paying and paying. We estimate
that the fees they pay to check-cashers and payday lenders alone add up
to nearly \$4 billion a year. You can make a lot of that business yours
\-- but only if you spend some time learning about the people who
patronize the nonbank providers and start catering to their needs.

Making these folks your customers would also render a great service to
your community, because you know that they are often gouged by the
nonbank providers and buried under a mountain of high-priced debt whose
only out \-- a ruinous one \-- is often bankruptcy.

Comptroller Hawke has made the point that the key to serving the
unbanked is for bankers is to make effective use of technology. You can
cut costs \-- and offer bank services at prices everyone can easily
afford \-- by reducing paper transactions and providing electronic
access to funds and other bank products.

The key is payroll direct deposit. The United States lags well behind
most European countries and Japan in the percentage of private employees
who use direct deposit, largely because of the prevalence of small
employers here who rarely see direct deposit as worth the trouble.

Here again is where you come in. These small businesspeople are already
your customers, and it\'s your job to convince them that direct deposit
[is]{.underline} worth the trouble. Some community banks are offering
various incentives \-- such as free or low-cost payroll processing \--
to businesses that are willing to adopt direct deposit for their
employees, who in turn sign up for ATM-based accounts. Those are the
bankers who are poised to take advantage of expanded customer
relationships in the future.

But technology has even wider application for community banks. Now don't
get me wrong; I\'m not saying that technology is any banker\'s panacea.
But for many community bankers, technology can be liberating \-- and
profit producing. Technology is what the military refers to as a "force
multiplier" \-- something that adds value to your existing assets but
may have little value in and of itself.

More and more community bankers have put that value to use. For many,
technology has provided a more comfortable margin of success.

Technology is being mobilized in various ways, both routine and
strategic. Some institutions have automated the loan application process
through technologies such as laptop origination and automated
underwriting. More than half of all community banks today use
profitability analysis software to aid in their corporate decision
making. Others have invested heavily in advanced systems to help manage
the paper flood. Document imaging and image check processing are helping
community banks get by with fewer people \-- without impairing their
ability to deliver high quality service.

The Internet is obviously another big part of the industry's future. But
perhaps better than your large-bank brethren, community bankers have
recognized an essential truth about technology generally and the
Internet particularly: it's no end in itself.

Many of you were initially skeptical \-- and properly so \-- about the
value that the Internet added to the health and profitability of your
institution. The well-publicized troubles of the Internet-only start-up
banks illustrate the wisdom of such skepticism.

But after spending a decent interval on the sidelines, more and more
community bankers have decided to join the game, having concluded that
online delivery is not only compatible with good customer service, but
also, increasingly, a vital adjunct to it.

Many of your customers are demanding it \-- and the customers who demand
it most are the very customers whom community bankers can least afford
to lose \-- those relatively high net-worth older folks and retirees I
was referring to a moment ago: your bread and butter.

These individuals, many of whom migrate with the seasons, place great
stock in personal banking relationships. But they cannot be without
access to their accounts year-round, even if their bank lacks a
brick-and-mortar presence everywhere they nest. These folks \-- these
prime customers \-- are among the most computer-literate segments of the
population, and for increasing numbers of them, online account access is
a must.

Judging by the rate at which community national banks have embraced the
Internet \-- with nearly three times as many having web sites today
compared to only two years ago \-- it's clear that you're giving those
customers what they're asking for.

Here in the OCC\'s Midwestern District, for example, the share of
national banks offering transactional Internet banking rose from 29
percent at start of 2001 to 44 percent at the start of this year.
Fifty-nine percent of national banks supervised by our Minneapolis field
office enable their customers to conduct transactions over the Internet.

So much for Mr. Microsoft's dinosaur characterization!

The Internet can also be a vital tool in helping community banks get \--
and stay \-- profitable. I'm thinking now of the myriad ways in which
doing business online can lower the cost of doing business. When
customers fill out an application, check account balances, make fund
transfers and loan payments, and do these things electronically, without
having to tie up one of your employees, you not only save money; you
also free up that employee to do things that add real value to your
bottom line. That's a win-win for you [and]{.underline} for your
customer.

All of this promise and potential, of course, comes with a caveat.
Internet banking may not be for everyone. It poses distinct risk
management challenges that must be understood and addressed.

Some of these risks, such as those related to web site security, apply
to banks of all sizes. But community banks are most apt to rely on third
party providers for advanced technology, and so it's particularly
important that you establish effective procedures to monitor vendor
performance. If you rely on a single vendor for Internet services, the
risk management challenges are even greater.

It's crucial that you develop appropriate contingency plans on the off
chance that your vendor will become unable to deliver on his or her
commitments. For if not appropriately controlled and provided for, such
a failure could prove highly damaging to a bank's ability to function
\-- and to its long-term reputation.

At the OCC, we're working hard to identify and analyze the risks
associated with Internet banking, and training our examiners to help you
manage these risks. If Internet banking is a delivery method you decide
makes strategic sense for your institution, we'll be there to help.

That brings me back to a point I made at the outset, when I cited the
burden of regulatory compliance as another area in which community banks
may perceive themselves as being disadvantaged as compared to their
larger counterparts. Whether this perception is valid or not, I cannot
honestly say. But you should know how sensitive we are to the burdens
that regulation imposes on all banks, especially during these
challenging times. And you should know what we're doing at the OCC to
help lighten the load.

In one respect, the disadvantage facing community banks that are also
[national]{.underline} banks is all too real. 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 but don't charge those banks for their services. Indeed, the
resources used by the Fed and the FDIC for this purpose are provided in
large part by [national]{.underline} banks, which means that you are
effectively subsidizing the supervision of your 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 unfair and harmful to you and to the
dual banking system, and Comptroller Hawke has taken the lead in urging
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.

In the meantime, we are doing everything possible to control our costs
so as to minimize the burden of supervision on you. And, like you, we
too have embraced technology as a part of the answer.

National banks caught a glimpse of the future in this regard when we
introduced National BankNet a year and a half ago. Since then, we have
added a variety of enhancements to this extranet service, to which
almost 1500 national banks have already subscribed. If you haven't, I
would urge you to do so. It\'s one of the many benefits of being a
national bank.

But the best is still to come. The day is not far off when most
supervisory communications will be taking place through BankNet. You'll
be able to comment on proposed regulations, pay your assessment bill,
and file corporate applications, all online. And we're working to
further automate the examination process itself. We call that
"Supervision of the Future" \-- and it looks to the day when examiners
will be able to perform even more of their routine supervision remotely.

That will mean fewer burdens on you \-- less staff time preparing for
exams, less time producing paperwork, and a less intrusive examiner
presence. But let me assure you that your examiner will be there when
you need her. The time spent at your institution will be quality time,
more productive time, and time that produces greater value to you. We're
working very closely with the industry to ensure that our supervision is
responsive to your needs.

So let me leave you with these thoughts. Continue to base your franchise
on the delivery of high quality personal service to your customers. Make
prudent use of the advantages of technology. Seek out new markets \--
especially among underserved elements of your service population. And
hang in there \-- because your hard work, perseverance, and creativity
will pay off. Keep it up for the sake of your communities \-- and for
dinosaurs everywhere. Thank you.