New guidelines for bank examiners do not single out derivatives for special treatment, a top regulator told bankers at a Bank Administration Institute conference in New York.
Douglas E. Harris, senior deputy comptroller for capital markets at the Office of the Comptroller of the Currency, said Monday that the OCC's newly released guidelines urge bank examiners to evaluate all risk-management procedures at banks.
"Our 93 pages of guidelines are intended to go beyond derivatives and to risk management in general," Mr. Harris said, noting that the job of making sure that banks conduct their risk management in a safe and sound manner now falls squarely on the shoulders of the OCC's bank examiners.
In a speech before bankers at BAI's Asset, Liability, and Treasury Management Conference, Mr. Harris said the new guidelines are intended to ensure that banks have adequate controls in place.
"Our goal is to neither increase nor decrease the capital requirements, but to ensure banks have adequate capital," he said.
Derivatives are often-volatile financial instruments whose value is tied to currencies, interest rates, and other benchmarks. The instruments have received unfavorable publicity recently due to losses by such users as Procter & Gamble Co.
Responding to a question, Mr. Harris seemed to signal that bank regulators believe banks are acting responsibly as dealers, saying Procter & Gamble is a sophisticated corporation that knew the risks of the investment.
Another corporation that lost money on derivatives, Gibson Greetings, has charged in court that Bankers Trust New York Corp. misrepresented the derivatives it sold to Gibson. P&G has said it was considering legal action against the same bank over its losses.
The deputy comptroller said one of the most important areas that examiners will be concerned with is credit risk controls. And although the OCC's current guidelines are not intended to address the issue of counterparty or customer suitability, Mr. Harris said that indirectly the new guidelines will address it.
"Banks equate suitability with accountability. But it is simply a credit risk measurement. We don't deny that [banks'] customers will benefit from this though."
Mr. Harris said, too, that OCC examiners will now look more closely at banks using structured notes.
He pointed out, however, that just because a bank may have a large ratio of structured notes to equity capital, it does not mean that the bank is in a precarious position.
"You have to look at the structure of the instruments and if the bank can handle the risks involved" he said.
"Our examiners need to look beyond the instruments to the issuer."
Mr. Harris also thinks it is likely that new legislation will be enacted during the next congressional session, but that it will be directed toward unregulated broker dealers rather than banks. "We have convinced Congress that we are on top of things," he said. "We have all the power that we think we will need."
