While admitting that today's lending environment is brutal, Comptroller of the Currency John D. Hawke Jr. said bankers are taking too many risks.
"The challenge of today's risk environment for bankers is greater today than I have seen in almost 40 years," he said in a speech to compliance officers at a Bank Administration Institute conference in Orlando.
"These days, even marginal customers can demand and receive preferential terms and pricing that Fortune 500 corporations might have blushed to ask of their banks 20 years ago."
But while risk in the overall banking system is increasing, Mr. Hawke said, some bankers view key internal controls such as credit reviews and audits as "needless frills."
To meet the intense pressure for earnings, bankers "cut corners, chip away at functions that don't contribute immediately and directly to the bottom line, and look the other way instead of walking away from some of the one-sided deals that, unfortunately, continue to be consummated," he said.
OCC surveys indicate that some of the largest national banks have understaffed audit departments, with turnover rates exceeding 20% a year.
"The biggest deficit in audit resources and expertise is reportedly in the information technology area-a critical component of every banking activity," Mr. Hawke said.
Allen Sanborn, president and chief executive officer of Robert Morris Associates, a lending trade group, agrees with Mr. Hawke.
"That's a pretty important message right now," Mr. Sanborn said. "You really do need that check and balance more today."
Mr. Hawke was clearly trying to remind bankers that the economy will not expand forever, and that bad loan decisions today could result in losses tomorrow. His speech echoed several years of warnings about deteriorating credit underwriting standards.
"We see continued evidence of credit standards being relaxed, despite the fact that the OCC and our sister agencies have been sounding off about the secular decline in credit underwriting standards for more than two years now," he said.
To make matters worse, Mr. Hawke said that while riskier lending is increasing, loss reserves are decreasing. Net chargeoffs have been rising during the last three years-a time of great economic expansion-and noncurrent loans rose last year for the first time since 1990.
Mr. Hawke divided the risk that bankers must manage into two categories. Environmental risks such as macroeconomic forces are beyond a bank's control, he said. But banks can control what Mr. Hawke called "volitional risks," or the individual choices bankers make every day.
"When a credit officer, bedazzled by the star quality of a fashionable hedge fund, goes ahead with a loan despite being denied access to critical financial information, that loan officer is adding to the institution's volitional risk," Mr. Hawke said.
He rebutted the oft-cited notion that bankers are in the business of taking risks.
"Bungee jumpers, sky divers, and Indy 500 drivers are in the business of taking risk," he said. "Bankers are in the business of managing risk."
Mr. Hawke said that means bankers must identify, quantify, and control risk by adhering to sound credit policies and carefully tracking exceptions.
The only way to accomplish that is through internal audit and credit review, he said. "I can think of no practice more penny-wise and pound foolish than to reduce those resources simply because things seem to be going swimmingly now."