NR 97-25
March 13, 1997


                          Remarks by 
                        Eugene A. Ludwig
                  Comptroller of the Currency
                                
                             before
                                
               New York State Bankers Association
                Annual Financial Services Forum
                        Washington, D.C.
                                
                         March 13, 1997

I am honored to have the opportunity to meet with you and learn
from your collective experience.   For almost the entire history
of our republic, New York has been an important American center
of banking and finance.  In this century, that has meant not just
a national center but a world center of banking and finance. 

I always like to tell the story that when Abraham Lincoln and
Salmon P. Chase looked for a model for the national bank charter,
they looked to the New York state banking statute.  They did this
because the New York courts had interpreted the grant of bank
powers in that statute to be broad and designed to evolve over
time.  In short, both your legislators and courts, as far back as
the last century, understood that finance would not and could not
stand still and remain relevant.  Banks had to evolve with the
changing times.

In today's high-tech environment, changes in finance are coming
at a faster pace than ever before.  The rapid pace of change
places a premium on the need for our financial institutions to
evolve in order to stay healthy and to contribute to our economy. 
Within the last decade, we have seen changes in risk control and
modeling techniques used by banks that would have staggered the
imagination of earlier generations.  Every day, domestic and
international markets present new challenges for all of us.  Here
again, an earlier generation of bankers would have been staggered
by the rapidity with which we all must address new challenges.

These rapid changes have also placed a considerable premium on
exchanges such as the one we are having today, between the
regulated and the regulators.  It has always been important, but
it is even more important today, that we communicate openly and
often, sharing our concerns and our ideas about how to make the
banking system safer and sounder, more competitive, and better
able to serve the needs of America's consumers and communities. 
Since becoming Comptroller, I've come to appreciate that an
important part of the job is communication -- both listening and
speaking out.  It is absolutely essential for us to stay directly
in touch, and for you to feel that when you have a question,
comment or problem, you can talk about that issue with me and
others at the OCC.  Of course, we may not always agree, and at
times we haven't.  But it is important that we are able to share
our perspectives in a direct and candid fashion.

A Comptroller simply can't do this job any other way.  That's why
I speak at events such as these, and why I make personal visits
to the largest 25 banks we supervise every year.  It's also why
OCC's entire senior management team has established strong and
continuing outreach programs to bankers and bank customers, and
has actively sought your input on proposed policies.  I'm proud
of the open lines of communication we've cultivated with the
entire banking industry through a series of Meet the Comptroller
meetings, and I'm equally proud of the direct lines of
communication we've built with representatives of the customers
and communities our national banks serve.  Regulators who are not
accessible to the industry they regulate and to the diverse
constituencies served by that industry simply cannot be
successful in carrying out their primary responsibility: 
ensuring the long-term safety and soundness of the banking
industry to support the economic well-being our nation.

From where I sit, ensuring the industry's long-term safety and
soundness means several things.  It means sounding a note of
caution when events warrant supervisory concern and industry
prudence.  It means enhancing the ability of the industry to
evolve with a changing market and changing consumer needs.  It
means ensuring that the industry strives ever harder to offer
broad and fair access to the services it provides.

In fact, as I look back at my previous speeches to the New York
State Bankers Association, they demonstrate the varying nature of
the regulator's responsibility.  You may remember that in 1994,
as your new regulator, I made the case of why financial
modernization was needed for an industry and an economy that had
undergone significant change in recent decades.  When I came back
a year later, interest rates had begun to roller coaster, and I
felt compelled to discuss the need for banks to take a hard look
at their interest rate risk profiles.  Last year, in Lake George,
the theme was financial modernization once again.  Congress had
agreed with the need for modernization but the method for
achieving that goal was subject to intense debate.  So I shared
my views of what I believe broad financial modernization must
entail.

That brings me to 1997.  Circumstances dictate that I use this
opportunity to shine the spotlight on important safety and
soundness issues.  I want to discuss safety and soundness with
you today for several reasons.  First, I am certain that the
banking industry, which so importantly needs the ability to
compete and to enter new product areas to remain healthy over the
long-term, will be allowed to do so only if it can prove to the
Congress and the public that it is able to manage risk more
effectively than in the past decade.  Second, as the long
expansion that we have seen in the economy continues to roll
forward, it creates a dynamic that is decidedly unhealthy.  Like
the Siren song that almost shipwrecked Odysseus, the continuing
expansion causes us to forget that cycles are an inherent part of
a free market economy and to forget that this expansion, like all
others, will not go on forever, but will without question end
with a down cycle.  And, third, I want to focus on safety and
soundness today because we are continuing to see signs of
slippage in some areas that you and we must address now.

In talking about safety and soundness today,  I want to discuss
three areas: internal controls, consumer credit, and financial
modernization.

                        Internal Controls

First, let me turn to internal controls.  Last fall, I spoke out
on what I believed was a very troubling dynamic.  As some banks
were looking hard at increased efficiencies to help fuel
profitability, they were considering cuts in internal controls. 
Certainly, increased efficiency is a desirable goal, and internal
controls are not immune from review for their efficiency.  But
every financial entity should be very cautious about slimming
down internal controls lest it weaken a function critical to its
long-term health.  I noted last fall that we had seen some
evidence of banks that were focusing too much attention on
savings in the internal control area and paying too little heed
to the potential damage that such savings could cause.

Over the last several months, our examiners have focused their
attention on banks' internal control systems to determine if
critical activities are being sacrificed in the drive for
enhanced earnings. And, unfortunately, we continue to see actions
at some banks that give us cause for concern.  Accordingly, today
I urge each of you and each of your colleagues in national banks
to review this area and give careful scrutiny to proposals to
save money at the expense of weakening these controls in any way. 
Indeed, I would urge you to go further and work on ways to
strengthen your bank's internal control area.  Failures in
internal controls have been at the heart of a very high
percentage of banking industry troubles for generations.  For our
part, we are asking OCC examiners to highlight their concerns in
this area during their regular discussions with bank management
and to work with management to ensure that weakening in this area
does not occur.

                         Consumer Credit

I also want to say a few words about consumer credit --
particularly as it relates to credit cards.  In the last three
years, median outstanding credit card balances have increased by
36 percent, and the median total credit limit has nearly doubled. 
In the past, consumers had somewhat predictable repayment
patterns.  Today, these repayment patterns are increasingly
difficult to predict.  With greater frequency, consumers who have
no pattern of delinquency are building up large credit card
balances and then filing for bankruptcy without warning.  These
changes in consumer behavior are affecting retail credit
portfolios in all banks, both large and small.  It is worrisome
to consider that there was a 44 percent growth in credit card
losses, and a 50 percent increase in credit card delinquencies
during the past year.  Further, according to the Standard &
Poor's Credit Card Quality Index, credit card chargeoffs
increased significantly in the first month of 1997.  The monthly
loss rate for the $220 billion bank-issued credit card securities
market hit 6.5 percent in this January, compared to 4.7 percent a
year earlier.  These statistics are particularly troubling given
the current health of the economy.

On the positive side, we have seen and we continue to see banks
tightening underwriting standards in this area.  Current losses
likely represent weaker credits making their way through the
pipeline -- business activity undertaken before the industry
began to respond to regulatory warnings and tightened their
credit card underwriting standards.  However, we can expect some
continued losses before we begin to see the beneficial effects of
more cautious underwriting decisions.

As I indicated earlier, the role of the regulator is to take
action before potential problems become real problems that
trigger in response the type of credit crunch we saw in the late
1980s.  Let me be clear that what we're seeing today does not
necessitate a retreat from the lending market. Markets remain
strong, and banks should pursue profitable opportunities.  But in
doing so, banks cannot ignore the fundamentals.

                 Portfolio Credit Risk Management

To ensure that fundamentals are in place and adhered to, the OCC
is, today, issuing an advisory on credit underwriting standards
and portfolio credit risk management.  Our goal is to remind
national banks how changes in underwriting standards affect
overall portfolio credit risk and to highlight the key components
of an effective portfolio credit risk management process.

This advisory will help banks develop and strengthen their own
processes to identify, measure, monitor and control loan
portfolio credit risk.  It does not establish any new
requirements that banks must adopt to manage their overall
portfolio credit risk. Instead, it highlights concepts that all bank managements should review to see how they can be
applied to an effective risk management program in their own
institutions. The extent to which each bank formalizes these
processes will depend upon the size and complexity of the
institution as well as its business strategy.

Let me briefly highlight a few of the central components of risk
management.

First, it's important for banks to assess periodically whether
their employees -- from loan origination to marketing --
understand their institution's credit culture, and to gauge if
employees are conforming with desired standards and values. 
Further, banks should review their compensation systems to ensure
that they reward employee performance that meets long-term
objectives for credit quality.  In other words, if your bank has
a relatively low tolerance for portfolio credit risk, your
compensation system should reward employees based on the quality
of loans booked -- not the quantity of loans originated or the
volume of fees generated by those loans.

Second, risk management depends on adequate management
information systems.  We encourage all institutions to assess
periodically the quality of their technology in light of loan
growth, acquisitions and changes in their business strategies. 
Maintaining an adequate credit management information system
heightens your ability to segment loan portfolios and isolate key
risk characteristics. 

Third, each bank must be able to assess the effect of loans
originated and underwritten at other financial institutions on
its credit risk profile.  We remain concerned that banks may be
purchasing loans based on underwriting standards inconsistent
with their own established risk acceptance criteria.  Banks must
perform proper due diligence before deciding whether to acquire
such credits.  Before engaging in a syndication or a
participation, a bank should evaluate the risk of the proposed
credit to determine if the loan meets its strategy and risk
tolerance.  While time is often a factor in deals of this nature,
a tight deadline should not be an excuse to bypass established
portfolio management processes. 

Finally, the advisory letter emphasizes the value of stress
testing.  In addition to stress testing significant individual
credits, bank management should consider weighing key portfolio
segments against hypothetical scenarios to identify flash points
that could push risk beyond acceptable levels.  It may be
valuable to assess how the portfolio would respond to events such
as rapid interest rate change, technological changes, commodity
or other price shocks, and a downturn in the business cycle.   A
good method is to determine best, worst and most likely scenarios
for each segment of your portfolio, and to have contingency plans
in place that would increase monitoring, limit portfolio growth,
and provide hedging or exit strategies if circumstances warrant. 
In short, this advisory letter will help focus the industry's
attention on the importance of comprehensive risk management
processes. 

                     Financial Modernization

Finally, let me turn to financial modernization.  Financial
modernization is first and foremost a safety and soundness issue. 
Strategic risk -- in this case the risk of not being able to
offer the products and services that the market demands -- is, in
the long term, the most important risk facing the banking
industry today.  In our dynamic economy, if banks are not able to
offer new products, to evolve as the markets evolve, they will
not survive as healthy entities.  Accordingly,  I am pleased to
see that the Congress has recognized the importance of this issue
and has given financial modernization priority on its agenda for
this session.  I am similarly pleased that the Federal Reserve
has taken action in this area.  The OCC, too, will continue, as
we have for the last several years, to allow the system to
evolve.  

Today, I want to focus particular attention on one aspect of
financial modernization -- the importance of giving financial
services firms the flexibility to conduct their businesses
efficiently.  It is not enough for a statute or regulation to
allow banks to evolve if the law or regulation permits evolution
only in such an inefficient way that banks cannot actually
compete with other entities.  For banks of all sizes, needless
inefficiencies -- whether in corporate structure or otherwise --
exact a high cost for consumers, for America's economy, and for
the safety of the banking industry.  If banks are saddled with
inefficient structures or requirements, they will either shrink
or take on greater risks to maintain earnings.  Markets for
financial services will be less competitive, and fewer resources
will be available to meet community development needs.  Customers
will face higher fees, reduced service, and fewer options. 
Further, the ability of U.S. institutions to compete in the
global marketplace will be impaired, and American businesses and
consumers may ultimately be the losers.  As we go forward to
modernize our financial system, it is essential that we pay
careful attention that we truly modernize in a meaningful way --
in a way that allows the marketplace to work for all providers
and consumers of financial services.

                            CONCLUSION

As I said at the outset, one of the most important lessons I've
learned as Comptroller is the importance of timely, two-way
communication -- both listening to the concerns of banks and the
communities they serve, and speaking out when necessary to ensure
the safety and soundness of the banking industry.  Today, the
circumstances warrant that I assume the role the regulator must
take from time to time -- giving voice to supervisory concern
about immediate safety and soundness issues.  I urge you -- as
some of the nation's leading bankers -- to remain focused, both
on the importance of financial modernization and on the
importance of fundamental risk management.  I'm confident that, working
together, the nation's banks and the OCC can continue to provide
this country the modern, strong and vibrant banking system it
needs today and tomorrow.

                              # # #

The OCC charters, regulates and supervises approximately 2,800 national banks
and 66 federal branches and agencies of foreign banks in the U.S., accounting
for more than half the nation's banking assets.  Its mission is to ensure a
safe, sound and competitive national banking system that supports the
citizens, communities and economy of the United States.