Remarks by
John D. Hawke, Jr.
Comptroller of the Currency
Before the 
National Association for Business Economics
Washington, D.C
March 25, 2002

Theres 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 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 wide to be accommodated 
within a single uniform framework.  

But where the Basel Committee has been quite successful -- in its previous work 
as well as its current work -- has been in identifying common principles 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 countrys 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.  

Its 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 its certainly true that the banking systems 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.