NR 98-97
September 18, 1998                                                        
     


 Acting Comptroller Williams Provides Details of Deteriorating
                     Bank Credit Practices

WASHINGTON, D.C. -- Acting Comptroller of the Currency Julie L.
Williams provided new and detailed examples today of the kinds of
poorly-underwritten loans that have led the OCC to warn that
banks need to tighten loan underwriting standards. 

"As we see other nation's economies bobbing in turbulent waters,
it is doubly important that, here in the United States, bankers
address and correct any weaknesses in their loan underwriting,
mindful of the possibility that our own economic seas could also
turn stormy," she said in a speech to a meeting of the Bankers
Roundtable.

"Taking care now," she emphasized, "is important to the future of
each of your banks -- and to the health of the nation's economy."

The OCC has been warning for more than two years now of slippage
in loan underwriting standards.  Ms. Williams said she was
providing detailed examples of poorly underwritten loans because
industry representatives suggested, following a July 13 speech on
sliding credit practices, that specific examples of such loans
would be effective in helping to reverse that trend.

Reacting to those suggestions, Ms. Williams assembled a team of
highly-experienced credit analysts to review loans at larger
banks and identify those that cause concern.  

"We call loans with fundamental structural weaknesses  ugly
loans,' she said. "And that is why, around the OCC, this exercise
has come to be known as the Ugly Loan project."

Among the examples Ms. Williams cited was a company with zero
working capital, negative net worth and over $50 million in
operating losses last year that was nonetheless able to obtain a 
new line of revolving credit and a term loan from a national bank
that together total almost $500 million.

"One would think that this kind of borrower would be paying a
stiff premium for this credit, if it could find loans at all,"
Ms. Williams said. "But the contracted price was LIBOR + 150
basis points, currently 7.2 percent." 

Moreover, she said, the loan terms require that the borrower pay
interest only during the first four years, with graduated
repayment of principal starting in year five.  This same
borrower, she said, sold subordinated debentures with similar
maturities in 1996 and paid as much as 14 percent -- junk bond
rates.

Ms. Williams said banks should take immediate steps to deal with
poorly structured loans on their books, including the following:

     Increase the scope and frequency of loan reviews as a
     critical part of a bank's credit risk process;

     Augment workout staffs and involve workout experts in loan
     monitoring efforts;

     Periodically reassess their strategic portfolio objectives
     and risk tolerance limits; and

     Carefully examine the adequacy of capital and loan loss
     reserves in light of credit risk ratings.  A bank that has
     eased its underwriting standards should adjust its loan loss
     allowance to reflect the likelihood of increased credit
     losses.

The OCC, she said, will maintain the highest levels of
supervisory vigilance. Within the next two weeks, the agency will
implement a number of changes in its examination procedures that
were announced in July, including the establishment of a special
on-line system to capture data from examination reports.  The new
system will make it possible to track lending trends with much
greater specificity than in the past.

                              # # #

The OCC charters, regulates and examines approximately 2,600 national banks and
66 federal branches of foreign banks in the U.S., accounting for more than 58
percent of  the nation's banking assets.  Its mission is to ensure a safe and
sound and competitive national banking system that supports the citizens,
communities and economy of the United States.