Remarks by 
John D. Hawke, Jr.
Comptroller of the Currency
Before the 
American Bankers Association
Washington, D.C.
September 17, 2000

	Let me extend a personal note of welcome to Washington 
to the members of the American Bankers Association.  I think 
it's important for our nation's bankers to assemble 
periodically in the nation's capital -- not because this is 
the seat of all wisdom, to be sure, but because of the 
critically important relationship that we in government have 
with your industry.

	Indeed, I can think of no industry that's borne a 
heavier burden of government involvement than banking.  And 
although last year's landmark financial modernization 
legislation unshackles banks from many of the constraints of 
the past, the industry cannot be assured that tomorrow won't 
bring other burdens and impositions, enacted to achieve 
various public policy goals.

As professional bank supervisors, we're always looking 
for ways to make our supervision more effective and less 
burdensome.  The effort can be summed up in terms of two 
fundamental challenges: first, how do we balance our 
responsibility under the law for ensuring the safety and 
soundness of the banking system, on the one hand, with the 
burdens of supervision on the other -- burdens that, if not 
carefully contained, can actually undermine safety and 
soundness?  

I'm speaking now not only of the direct burdens of 
supervision -- the need to comply with a plethora of 
detailed regulations, and the intimate involvement in your 
business of platoons of bank examiners -- but also of the 
opportunity costs imposed by time-consuming procedural and 
paperwork requirements. 

Few would deny that the burdens of supervision have 
contributed to the erosion of the banking industry's market 
share and competitive strength over the years.  Although 
regulatory authorities on the state and federal levels have 
made tremendous strides in adding value to their 
supervision, I've long wished we could do more to tip the 
balance decisively into the plus column, so that we can all 
feel comfortable in the conviction that the benefits of 
supervision for banks outweigh the burdens.  

Now, perhaps, with some of the new tools we've 
developed -- tools that I want to talk to you about this 
morning -- we finally can do just that. 

The second challenge that supervisors have faced from 
the earliest days is one that's common to the human 
condition -- divining the future.  Since the beginning of 
recorded time, we've read tea leaves, consulted the stars, 
and paid tribute to those who claimed some special gift of 
prescience about future risks and opportunities.  In ancient 
times, oracles sacrificed a goat and sifted the entrails in 
search of clues to the future.  In more recent times, coal 
miners used canaries, housed in cages fitted to their 
helmets.  When the sensitive birds dropped from their 
perches due to lack of oxygen, the miners knew that danger 
lay ahead and that it was time to evacuate the shaft. We 
have long wished for an instrument of comparable reliability 
and predictive power in identifying the potential dangers in 
our banks, so that we can react to rising risk before it 
becomes too deeply embedded. 
 
Now, perhaps, we may be able to achieve that goal. 
It would be presumptuous to suggest that we've finally 
lain to rest the longstanding supervisory dilemmas I've just 
described.  But revolutions in practice can and do occur.  
And I believe that we're witnessing just such a revolution 
today -- one that will go a long way toward improving the 
cost-benefit ratio of supervision, reducing burden, and 
enhancing our ability to anticipate and control risk in the 
banking system.
 
It's part of the larger revolution in technology that's 
sweeping -- and transforming -- the globe.  It's been 
underway for quite some time, and we in the regulatory 
community have long embraced its benefits.  The OCC has been 
a government leader in automating its procedures, helping 
our examiners to work more effectively.  But only recently 
have we been able to exploit the promise of the technology 
revolution in a way that provides material benefits for 
bankers. 

A year ago, for example, the OCC unveiled National 
BankNet -- an extranet web site available exclusively to 
national bankers, which will, I believe, revolutionize the 
way supervisors and bankers communicate with one another.  
The first BankNet application, Comparative Analysis 
Reporting, or CAR, was quickly adopted by hundreds of 
national bankers, who have used its extensive database to 
generate reports on how their performance compares with that 
of their local, national, and regional peers.  Based on the 
feedback we've received, we've updated and refined CAR, to 
make it more comprehensive and user-friendly.  For example, 
users can now access total asset information on each bank 
and run comparative reports for different time periods. 
But as we promised last year, CAR was just the 
beginning of what BankNet would have to offer. The brochure 
you found on your chair this morning provides more 
information on our recent enhancements to BankNet, and I 
would urge you to visit the OCC booth for a personal 
demonstration.  I believe you'll be impressed by what you'll 
see, now and in the coming months: new analytical models, 
including early warning benchmarks and risk-based capital 
calculators, and new information sources, including internal 
OCC reports.  It will include legislative and regulatory 
analysis, economic and risk updates, "best practices" 
presentations, consumer complaint analysis, and other 
national bank-specific information -- all designed to help 
you function more effectively in today's competitive 
financial services environment.

Other BankNet modules will drastically cut the 
processing time for corporate applications and produce big 
reductions in regulatory paperwork.  Early next year, all 
national banks will be able to prepare branch and relocation 
applications on line, and submit them electronically.  Not 
only will national banks save countless hours in the filing 
process; it will lead to significant economies and ensure 
greater consistency and responsiveness in our licensing 
decisions.

Over the next few years, in fact, I anticipate that the 
majority of routine transactions between the OCC and 
national banks will be capable of being conducted 
electronically -- and securely -- over BankNet.  Examiners 
will exchange pre- and post-exam information and quarterly 
data with bankers on-line. Assessments and fees will be 
billed and remitted electronically.  Bankers will have the 
opportunity to file electronic comments on regulatory 
proposals.
 
And the future holds stills greater promise.  The day 
is near when I and other OCC officials will be meeting with 
national bankers on line -- to update you on regulatory 
developments, explain our policies, and answer your 
questions.  As national bankers, you'll have access to our 
on-line staff directory, to help you identify the individual 
responsible for your area of concern.  And when you have 
concerns -- with an application, a ruling, or an 
interpretation -- or when you need help picking your way 
through the regulatory thicket -- we'll be available, with a 
few keystrokes, to provide help and advice.  
Bank supervision has never been like this before.  
Clearly, it will never be the same again.  And that's all to 
the good.

Touting the value of technology to an audience of 
bankers is surely preaching to the choir.  Yet your 
experience -- and ours -- argues for considerable care in 
the way we apply technology and assess its benefits.  Even 
as we embrace technology, as your conference's theme says, 
we must work to "preserve trust."  For banks, that means 
meeting customers' expectations for service and privacy.  We 
know that bankers who have fallen short of these 
expectations -- for example, by forcing customers to deal 
with machines when they would have preferred to talk to bank 
employees -- later regretted it.  Not only did they suffer 
in the marketplace; they became lightning rods for public 
criticism and even legislative action.  For banks, 
preserving trust means maintaining consistently high 
standards of customer responsiveness.
  
For bank supervisors, preserving trust has different 
connotations. Supervision is not just about statistics.  
Sometimes the numbers don't tell the whole story -- or the 
true story, for that matter.  No matter how sophisticated 
our automated systems are today or how advanced they may 
become, understanding a bank's true condition requires an 
examiner's insight and intuition.  There's no substitute for 
the constructive interaction between bankers and examiners 
that can only take place across a table, face-to-face.  
Judging by what we hear from you about the value you place 
in the examiner's presence --- especially in smaller banks -
- it's clear you wouldn't have it any other way.  And 
neither would we.  The knowledge and experience of the 
national bank examiner will always be the foundation of OCC 
supervision. 

Making full use of the examiners' skill and judgment is 
the way that we "preserve trust."
Clearly, however, technology has a big and growing role 
to play in advancing the science of supervision -- in making 
it more valuable and less burdensome today, in the ways I've 
already discussed, and better able to anticipate tomorrow's 
risks. 

We don't use canaries anymore to alert us to 
environmental hazards.  But OCC's Project Canary serves the 
same purpose in the banking environment.  It's the name 
we've adopted for the OCC's core set of early warning tools 
-- a package designed to enhance our identification of -- 
and ability to respond to -- emerging risks.
   
Canary gives us what no bank supervisor has ever had 
available before: a focused, concise, and technologically 
advanced early warning system that will allow us to zero in 
on those banks that have the greatest amount of financial 
risk and the greatest possibility of problems. 

One of Canary's most important components is the system 
of benchmarks we've developed to serve as a kind of early 
warning tripwire.  Let me give you an example of what the 
benchmarks tell us and what role we expect them to play in 
our overall supervision.

The current set of benchmarks consists of 15 financial 
ratios and measures.  At present, six relate to credit risk; 
four to interest rate risk; and five more to liquidity.  By 
extrapolating from our supervisory experience, we've 
established a threshold in each case that represents the 
point at which we've found that risk tends to rise.  For 
example, experience teaches us that credit quality problems 
often increase when a bank's loan-to-asset ratio exceeds 70 
percent.  So that's where we've pegged that particular 
benchmark.

The finding that a bank has exceeded one or more of the 
Canary benchmarks will not trigger automatic supervisory 
action against the bank or anything of the sort.  It goes 
without saying that not all banks whose loans to assets 
exceed 70 percent become troubled banks.  The benchmark is 
simply designed to alert us to banks with a pronounced risk 
appetite in that area, so that we can allocate sufficient 
supervisory resources to probe more deeply.  For a bank with 
loans to assets greater than 70 percent,  for example, we 
would go on to evaluate the composition of the loan 
portfolio, the quality of the bank's risk management 
systems, and other related factors.  Only if our concerns 
were borne out by this more intensive analysis of multiple 
risk factors would we consider taking supervisory action 
against the bank.  But we'd be in a position to do it before 
the bank's safety and soundness were significantly impaired.  
It's important to note that the number of benchmarks, 
their distribution among risk categories, and the 
established thresholds are not fixed in stone.  Canary is 
meant to be a dynamic system that will constantly evolve to 
reflect changing circumstances and improvements in our 
understanding of risk. 

Individually, the Canary benchmarks may be more 
suggestive than conclusive about a bank's risk profile.  But 
they unquestionably correlate with the likelihood of 
problems.  Used judiciously and in combination, they point 
us to banks with higher than average risk appetites.  
Certainly they will help us allocate supervisory resources 
more effectively, ensuring that only those national banks 
that really need it receive high level supervisory 
attention. That means less supervisory burden on those 
institutions that don't. 

As excited as we are about Canary and the benefits we 
expect it to deliver, we also recognize what it can never do 
-- and what it was never intended to do.  What I said 
earlier about BankNet also holds true for Canary.  These 
systems are meant to augment, rather than replace, the work 
that OCC's highly skilled examiners do day in and day out at 
each and every national bank.  Although we're dedicated to 
continuous refinement of state-of-the-art technology to 
enhance the value of our supervision, our commitment to the 
support and development of the best bank examiners in the 
world is first and foremost. 

We're also committed to ensuring that our examiners 
make the best use of their time -- and yours.  Burden 
reduction is and always will be one of our top priorities.  
That's why we're working hard to find ways of improving 
coordination among the Federal banking agencies, to minimize 
needless duplication and overlap and complexity.  

Clearly, we've only scratched the surface with respect 
to what technology can contribute to easing supervisory 
burden.  At the OCC, we're hard at work in the early phases 
of a project that I call Examination in the 21st Century -- 
a project that looks to the day when examiners will have on-
line, real time access to all of the information they need 
to perform the supervisory function.  No longer will it be 
necessary for bank employees to compile vast stacks of paper 
for examiner scrutiny, or for bank duplicating machines to 
churn out multiple copies of those records for the 
examiners' use.  Our examiners will be able to sit at 
computer terminals at their duty stations and do the 
analytical work that needs to be done before meeting with 
bank management.  To be sure, many technical and legal 
issues will need to be resolved before this vision becomes 
reality, and we will need to work closely with you to make 
sure that we are jointly using the new technology in the 
most productive and least burdensome way possible.  But I 
believe that the vision of on-line, real time access to bank 
information holds the potential to further transform the 
supervisory process -- to reduce the burdens on you and to 
ensure that the time of our examiners is spent productively 
and well.
  
Sometimes small changes can produce dramatic results.  
I believe that even a marginal improvement in the 
comparative burdens and benefits of supervision can and will 
make a big difference in the health and competitiveness of 
the banking industry.  That's the premise that's been 
driving the supervisory innovations I've discussed with you 
this morning.  By leveraging the expertise we've been 
building at the OCC for more than a century, technology will 
enable us to better serve you, just as it enables you to 
better serve your customers.