Regulators claimed Wednesday that their new focus on risk management will help them detect bank problems before they become disasters.
"The advantage of this supervision-by-risk approach that everybody's focusing on is that it is prospective," Comptroller of the Currency Eugene A. Ludwig said in testimony before the House Banking Committee. "What we ask our examiners now to do first is think about what is the risk profile of this institution, not only now but on a going-forward basis. Traditional methods, while they were risk-based, tended to be more static."
But top banking agency officials stressed that their risk emphasis does not mean an end to looking through loan portfolios and requiring minimum capital-to-assets ratios.
Richard Spillenkothen, director of banking supervision at the Federal Reserve Board, said: "Assessing 'old-fashioned lending' and evaluating loan quality and the adequacy of bank capital and loan loss reserves will remain paramount."
Jonathan Fiechter, acting director of the Office of Thrift Supervision, was the least willing to claim regulators have mastered risk assessment. "After each banking crisis we've said we're going to predict the next one," he said. "We will continue to have, I suspect for the indefinite future, problems."
In recent months, the Fed has announced that it will start grading banks on risk management, the Comptroller's Office has unveiled a new "supervision-by-risk" approach for examining large banks, and the Federal Deposit Insurance Corp. has said it too will be doing more to measure and control bank risk. The agencies also have been working to incorporate various price and interest-rate risks into capital standards, with the OTS leading the way.
Many of these changes are spurred by technological advances that have allowed banks and regulators to more precisely measure the risks posed by market movements. But the regulators repeatedly stressed the limitations of computer models and other high-tech solutions.
In fact, the three bank agencies have given up for now on devising a uniform capital standard for interest-rate risk, said FDIC Chairman Ricki Helfer.
The standardized interest-rate risk measurement model that the bank agencies published for comment last week "was not effective" for banks with complex portfolios, Ms. Helfer said. "In the meantime, we feel very comfortable with an approach that requires very firm analysis of interest- rate risk management at individual institutions."
House Banking Committee Chairman Jim Leach, R-Iowa, said he called Wednesday's hearing in an attempt to spotlight future problems at a time when banks and thrifts are extremely healthy.
Some at the Comptroller's Office had feared Rep. Leach would use the hearing to continue his ongoing and sometimes heated debate with Mr. Ludwig over bank insurance powers. In fact, Rep. Leach didn't bring the subject up, and reserved his criticisms for the fact that Fannie Mae and Freddie Mac, the mortgage agencies, are subject to lower capital requirements than banks and thrifts.
"If a government-sponsored enterprise operates as a savings and loan, and it only needs to keep 2% capital against a held mortgage, and the institutions you regulate have to keep 5%, 6%, 7%, all that means is for less capital one can run a larger mortgage portfolio," he said. "That tilts the landscape of American finance."
