NR 96-146
December 19, 1996

                          Remarks by 
                                
                        Eugene A. Ludwig
                  Comptroller of the Currency
                                
                             Before
                                
                   The Brookings Institution
                        Washington, D.C.
                                
                       December 19, 1996
                                

Good morning.  It is indeed a pleasure to open this National
Issues Forum devoted to assessing the impact of the Federal
Deposit Insurance Corporation Improvement Act of 1991 five years
after its enactment.  I want to commend both the Chicago Clearing
House Association and The Brookings Institution for assembling
this program and bringing together an impressive array of
speakers and commentators.  I'm very honored to speak here at
Brookings, an institution that has an impressive legacy of
shedding light on some of the more complex issues of importance
to America.  This legacy -- of providing a forum for thoughtful
analysis as opposed to heated rhetoric -- has served all of us
who care about addressing the nation's challenges in a
productive, collaborative manner.  I hope I can contribute -- in
some small way -- to this legacy today as we discuss the
importance of safety and soundness legislation and the
contribution FDICIA has made to a goal we all share -- a stronger
American financial services industry.

FDICIA has been called by some the most important piece of bank
safety and soundness legislation since the Great Depression.  Of
course, its critics -- during the legislative debate and since
FDICIA became law -- have also called it other things . . .
things that decorum does not allow me to repeat publicly.  The
question I'd like us to consider this morning, as we recognize
FDICIA on its fifth anniversary, is this:  one cheer, two cheers,
or three cheers for FDICIA?

In the best traditions of Brookings, let us begin by careful
consideration of what we know based on our experiences living
with FDICIA over these past five years.

First, we know that the banking industry today is quite strong. 
Notwithstanding dire predictions by some that FDICIA would over-burden the banking industry and send it into a sharp decline, the
last five years have seen record bank profitability and increased
vitality, as the number of failed or assisted banks dropped from
82 in 1991 to just five in 1996.  Commercial bank earnings in the
third quarter of 1996 made it the third most profitable quarter
ever recorded, with earnings over $13 billion and a return on
assets of 1.26 percent.  Bank earnings for all of 1996 are
projected to  exceed $50 billion.  Given the sound economy, it
almost certainly is a stretch to claim that FDICIA caused this
improved picture, but it is fair to say that the law did not set
off the downward spiral feared by those who believed it would be
too onerous.

Second, we know that the banking industry is better capitalized
than at any time in our professional lifetimes.  The most recent
data show that the country's commercial banks are capitalized to
the tune of over $423 billion, with an equity-to-asset ratio of 
8.3 percent, the highest level in decades and 160 basis points
higher than the 6.71 percent when FDICIA was signed into law. 
Even if FDICIA cannot plausibly be credited with the industry's
record profitability, I think it must be credited -- at least in
part -- with this noteworthy increase in capital.   FDICIA
required each federal bank regulatory agency to biennially review
its capital standards for insured depository institutions and to
revise its risk-based capital standards to ensure that those
standards take adequate account of interest rate risk,
concentration of credit risk and the risks of nontraditional
activities.  As our Office noted in its response to GAO's audit
report, Bank and Thrift Regulation: Implementation of FDICIA's
Prompt Regulatory Action Provisions, from the passage of FDICIA
through the end of 1995, equity capital at commercial banks
increased from $231.7 billion to $349.9 billion -- an increase of
51 percent in only three years.  During this same period, the
aggregate commercial bank equity-to-total asset ratio increased
from 6.75 percent to 8.11 percent -- its highest level since the
1960s -- while the risk-based capital level increased from 10.67
percent to 12.78 percent.  A number of studies have found that
increases in bank capital levels and capital-to-asset ratios in
recent years have been a response to regulatory changes --
including FDICIA -- and the greatest response has come from
previously undercapitalized institutions.   There should be
little doubt that FDICIA is part of the reason for the positive
capital picture we see today.

Third, we know that the FDICIA of today has benefitted from some
fine-tuning.  Congress recognized that some parts of FDICIA could
be amended in a way that provided greater flexibility without
sacrificing the law's intent.  For example, changes to FDICIA
since its enactment have (1) permitted CAMEL 1 and 2 institutions
with less than $250 million in assets to be examined on an 18-month cycle rather than annually; (2) eliminated the requirement
that independent auditors attest to an institution's compliance
with safety and soundness rules as part of the annual audit; (3)
removed the banking agencies' authority to set compensation
levels for insured institutions, and (4) exempted some branch
closings from FDICIA's requirement of 90-day prior notices.

Fourth, we know -- or at least, based on my observations as
Comptroller, I believe -- that FDICIA has advanced the banking
industry's safety and soundness focus by encouraging bank
management to better identify and control risk.  To put a fine a
point on it, the knowledge that reductions in capital will
trigger the prompt corrective actions required by FDICIA creates
a healthy caution within the industry.

That is a relevant part of the picture of banking over the last
five years, but I believe that the jury is still out on FDICIA's
long-term significance for bank safety and soundness.  FDICIA may
be a step forward, but how great a step is uncertain.  For
although the emphasis on capital is clearly positive -- as is
much of the impact of the prompt corrective action rubric -- two
factors remain unclear.  First, it is not clear to what extent
the strong economy has masked some of FDICIA's downsides.  And
second -- a related point -- it is simply not clear whether
FDICIA will tie the supervisors' hands too tightly in a period of
genuine crisis. 

It must be remembered that FDICIA -- or any law -- cannot by
itself guarantee the safety and soundness of the American banking
system.  Safety and soundness demands continuing, forward-looking
supervision.  FDICIA sets benchmarks, strengthens capital and
creates a prompt corrective action framework.  But prompt
corrective action is something of a blunt instrument.  The
responsibility falls to the supervisor to work -- in a
preemptive, rather than merely a corrective capacity -- to ensure
that institutions are well managed and risk-focused so that
FDICIA's blunt instrument is less likely to be put to use.

This has challenged the regulatory community to change along with
the evolution of the financial services industry.  Since FDICIA,
the OCC has strengthened and modernized its supervisory program
to help us better detect problems before they can infect the
overall health of the banks we regulate.  Most importantly, we
have adopted Supervision by Risk.  Supervision by Risk uses risk
as the organizing principle for all of our safety and soundness
supervision.  To do this, we defined a set of nine risks for our
examiners to focus on:  strategic risk, reputation risk, credit
risk, interest rate risk, liquidity risk, price risk, foreign
exchange risk, transaction risk and compliance risk.  Using the
Supervision by Risk method, our examiners can gauge the quantity
of risk exposure across the entire spectrum of a bank's
activities and assess bank management's ability to identify,
monitor and control risk.  While this program is still being
refined, it has been copied widely by other financial services
supervisors, particularly by foreign regulators as they seek to
improve the effectiveness of their supervision. 

In addition to Supervision by Risk, over the last several years,
the OCC has taken a number of other steps to strengthen its
supervision.

We have placed heightened emphasis on economic analysis -- both
in public policy debate and in supervision.  It's my belief that
to be a responsible regulatory agency, the OCC must energize and
contribute to the marketplace of ideas.  Our Bank Research
Division has hosted several conferences in recent years.  George
Kaufman -- one of the organizers of today's conference -- helped
organize our conference on systemic risk.  We also formed a Risk
Analysis Division within the Economics Department to build
additional expertise in financial risk modeling and to share that
information with examiners and policy makers within the OCC.

Further, we pioneered the use of economists' expertise in bank
examinations.  For selected examinations, the OCC teams bank
examiners with economists who have expertise in the quantitative
models used by banks.  This year, for example, economists have
contributed to over 40 national bank examinations.  Most of that
work has been done by members of our Risk Analysis Division in
the evaluation of financial risk -- particularly interest rate
risk and market risk in derivatives activities.  In addition,
economists have helped evaluate bank models used in the fair
lending area.

We have developed new computer tools for risk analysis and
enhanced supervision.  Just last week, we began test piloting a
new software system called "Examiner View" to increase the
quality of our bank supervision and reduce burden for
institutions.  Further, we are providing OCC examiners, analysts
and managers a greater array of technology tools.  Our Industry
Sector Information Service (ISIS) database provides fundamental
business information on 28 major industries, including recent
trends and future forecasts.  A separate database, our Integrated
Banking Information System (IBIS), provides time series data from
the FDIC and the Fed, supervisory data on national banks and
structure data on mergers and acquisitions.  These two
information systems make it possible for our examiners and
economists to do statistical modeling and analysis as part of
their supervision of both individual institutions and the banking
system as a whole.

We have created the position of  Deputy Comptroller for Risk. 
This position, filled today by one of the OCC's most seasoned
examiners, helps us identify and respond to new risks arising
from the evolving business of banking.  The OCC is the first
agency to assign a senior official full time to look for emerging
risks in the banking system.  Working closely with other units
within the OCC, the Deputy Comptroller for Risk identifies
potential risks in the banking system and recommends actions both
for banks and for the OCC to better manage those risks.  This
week, for example, the OCC released the results of our survey
describing how large national banks are using capital allocation
as a tool to measure risk vis a vis reward for specific bank
activities and products.  While capital allocation techniques are
still evolving, the survey helped us identify seven
characteristics of effective capital allocation programs to help
large banks decide how they should use this tool in their risk
management programs.

                            CONCLUSION

All of these actions are logical next steps to build on the
supervisory framework established by FDICIA.  And that brings me
back to my initial question: one cheer, two cheers, or three
cheers for FDICIA?  To make that assessment, we need to first
answer some additional questions.

Has FDICIA -- as amended since its enactment -- made the banking
system safer?  

And second, how will history ultimately judge FDICIA?

In answer to the first question, I would say yes --  FDICIA has
contributed to making the banking industry safer than it was in
1991.  But I also believe that what we have done in supervision
has gone beyond FDICIA to improve our ability to identify and
respond to problems in banks before these problems lead to the
kind of losses that ultimately could trigger prompt corrective
action.  When this improved supervision is wedded with FDICIA, as
in fact it already is, I believe we have made a big step forward
in safeguarding bank safety and soundness.

In answer to the second question, regarding how historians will
view FDICIA, I have to say that five years is too short a time to
be certain of its true impact -- particularly when those five
years have been characterized by continued strengthening in the
general economy.  Today, five years after FDICIA's enactment, the
only thing we can say with certainty is that time and experience
will be the ultimate arbiter of whether FDICIA is viewed as good,
bad or neutral. 

From what we know today, I would not give FDICIA the three cheers
its most ardent advocates would prefer, but I would suggest that
it is deserving of at least one cheer -- perhaps even two. And I
am hopeful that if regulators continue to take a balanced
approach to FDICIA and continue to strengthen supervision, we
will be able to say with confidence -- at a conference of this
sort sometime in the future -- two and possibly even three cheers
for FDICIA.

                              # # #

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.