If a bank conducts its subprime business poorly, we will object and take action so that corrections are made. We have a specific program to review all subprime lenders under our primary supervision. Our examiners will be closely reviewing loan loss reserves to check whether the levels are appropriate given the risk - and if they are not we will, again, take supervisory action. The third element of a prudent subprime program is capital. Loan loss reserves cover expected losses.
Capital covers losses that are unexpected.
I believe thrifts and banks with high concentrations of subprime loans should be required to hold more capital than the current rules now dictate. A lot more. At the FDIC, our thoughts are that the amount in the highest risk cases should be several times greater than the current requirement. Requirements would vary from institution to institution - many institutions engaged in this business already have the capital to support it adequately. Those that do not should begin looking at their capital allocation models.