As he ends an extraordinary five-year term as Comptroller of the Currency today, Eugene A. Ludwig makes no apologies for expanding bank powers or goading the industry into more community-based lending.
In an interview, Mr. Ludwig shrugged off criticism leveled by lawmakers who think he repeatedly exceeded his authority, pointing out that the Supreme Court has upheld in four unanimous rulings his decisions affecting bank sales of annuities, insurance, and other products.
While applauding banks' record profits, he did repeat his oft-stated warning that the industry is headed for trouble unless credit standards are tightened.
Credit card portfolios are already suffering as consumers become increasingly willing to walk away from their debt obligations, he noted, and home mortgages may be the next big problem.
"Consumers are more heavily borrowed than almost anytime in history," he said. "That leaves people very vulnerable to an interest rate increase or losing their jobs."
As for the future, Mr. Ludwig, 51, said he has no plans to return to his former law firm, Washington-based Covington & Burling.
Excerpts from the interview follow.
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You have pushed to expand the powers of national banks and criticized lawmakers for trying to rein in your authority. But banks have posted six consecutive years of record profits. Why do they need to expand into new lines of business?
LUDWIG: We've got a much more stable and robust banking system than when I entered government five years ago. But a lot of profitability is driven by dramatically increased fee income. This includes fees from new products. I think that proves that new service opportunities are essential.
Increasing efficiency has also contributed to healthy profits. But you can't get double-digit profit increases forever just by improving efficiency ratios. At some point you can't get any more juice out that lemon.
The banking system is quite vulnerable. Banking is an information business and the information revolution is getting more rapid. Banks have got to be able to compete in a cutting-edge way. For us not to allow banks to participate vigorously in the marketplace is terrible. It's not right.
You have vigorously defended one of your most controversial decisions, allowing banks to enter new business through direct subsidiaries rather than holding company affiliates. If this is so valuable, why have only two banks asked to take advantage of the change?
LUDWIG: It's not entirely surprising that we have not received more applications. I think many banks are waiting to see if suits are filed over (the municipal bond underwriting subsidiary approved for) Zions Bank.
This type of innovation has been essential in a dynamic economy. Fundamentally, it's not about making banks more important, it's about making them safer.
You have been continually criticized by many in Congress, who argue that you have overstepped your authority. Are the attacks unfair?
LUDWIG: It comes with the territory. In these jobs you cannot be too thin-skinned.
When the ruckus first arose, I was surprised. But what is most important is that the Supreme Court has said unanimously four times that our office was not meant to be overturned.
What's essential is that you have a certain amount of conviction and principle and stick with that set of views. We have a constitutional responsibility and we're not here to win popularity contests. You have to set a course, and you can't be swayed because somebody powerful doesn't like what you're doing.
Looking at the industry's behavior, are there practices that worry you?
LUDWIG: I do not see a systemic problem right now, but if we see continued slippage in underwriting standards - especially on the consumer side - the industry could be setting itself up for pretty serious bumps when the economy turns down.
Consumers are more heavily borrowed than almost any time in history. That leaves people very vulnerable to an interest rate increase or losing their jobs.
We've seen in our generation a secular change in people's attitudes toward credit and borrowing. People are more willing to take risks in their own household. Five or 10 years down the road I would worry about people leaving the keys on the counter in their houses and walking away.
First mortgages, which we have viewed as very safe, may become more risky. We've already seen similar changes with credit card portfolios. Consumer borrowing is something banks have to watch carefully for a long time.
You have mused about writing a book on the "democratization of credit," or the expansion of lending to low- and moderate-income people. What message do you want to deliver?
LUDWIG: The expansion of credit access has been one of the proudest accomplishments for American banking. What we've learned from it is the power of innovation, facts, and good analysis. There are many stories of products that regulators or bankers said would be either unprofitable or unsound and their warnings turned out to be exactly wrong.
For instance, the flexibility in home mortgages is particularly astounding to me. This has dramatically changed people's lives.
But do we have too much of a good thing? We're also facing greater debt burdens, more bankruptcies, and lower savings rates.
LUDWIG: All finance has risk. It's matter of managing it prudently. For instance, the problems we've seen in credit cards are not just a low- and moderate-income issue. There are many examples of doctors and dentists who have had problems after credit extension.
Making more credit available cannot be an excuse for laxity. Bankers must make sound loans that are profitable.
You have been a big advocate for the Community Reinvestment Act. But many institutions have relied on riskier products such as high-loan-to- value mortgages and character loans to small-business in order to boost their community lending portfolios. Has CRA weakened portfolios and can these loans survive a recession?
LUDWIG: I was one of earliest people to give warnings about this. But properly underwritten, there is no evidence to suggest that as a class these loans perform any less well than other lending.
Regulators have been criticized for giving 98% of the industry outstanding or satisfactory grades on their CRA performance. Are CRA reviews too easy?
LUDWIG: I think we give good exams. Banks are demonstrably doing better. There has been $355 billion in CRA commitments in the last five years. In the previous 15 years, CRA commitments totaled only $40 billion. So it's no surprise that grades have not gone down.
What accomplishments during your five years as comptroller have been most satisfying?
LUDWIG: Let me say it's been a team effort all along.
But improving safety and soundness is one thing. I'm tickled as can be that supervision-by-risk has taken off. Looking ahead to find potential problems is difficult, but you can't have a safe and sound banking system if all you do is look through the rearview mirror-all you do is repeat past mistakes.
Secondly, there's regulatory burden reduction. Rules are like a coral reef constantly growing around an island. Burden is pernicious and makes the industry less efficient.
Third, would be improving competition by expanding mutual funds, municipal securities underwriting, and operating subsidiary activities.
Finally, CRA improvements. I'm proud of the industry for the way it has handled community investment. We have whole states that will be mostly minority populations in the 21st century. For banks not to connect with those populations is fundamentally harmful to the industry.
What are your plans for the future?
LUDWIG: I will start vigorously trying to settle my job situation immediately. I'm not much of person to sit around and vacation.
I definitely don't want to go back and practice law. It's a book I've closed and don't want to reopen.
Leaving this job is very painful, but intellectually I know it's the right thing. They have terms for a reason and it will be helpful for the industry to have someone else in here.
