of the Currency John D. Hawke Jr. acknowledged how hard it is for examiners to criticize lending practices when banks are making record profits.
"We have experienced some real difficulties in getting bankers and bank directors to take seriously our criticisms of structurally weak loans when those loans are currently performing well," Mr. Hawke said in a Wednesday evening speech that was released Thursday. "Yet we know that when the economy turns, these loans will experience deeper losses."
To "add credibility" to bank examiners' warnings, Mr. Hawke said he has asked his staff to "focus on refining and elaborating the range of supervisory responses that we have available."
An OCC official explained Thursday that the comptroller's plan "is not designed to alter the range of supervisory actions we can take or to change our enforcement policy." Rather, the goal is to supplement the "moral suasion and gut feelings" of regulators with "quantifiable evidence that is empirically based," he said.
To that end, in his speech to the board of the Bank Administration Institute, Mr. Hawke unveiled "Project Canary," an early warning system the agency began working on in April. Its goal is "to spot emerging trends in industry risk and project future events with a higher degree of accuracy than is possible today," Mr. Hawke said.
To date, Project Canary has been focused on creating an inventory of the predictive tools available to bank examiners and creating new ones. For instance, the "Bank Calculator" is being developed to use various ratios to "try to determine the likelihood of banks developing problems over a specific time horizon," the OCC official said.
Such tools are designed to help examiners respond in what Mr. Hawke referred to as "a modulated way" to banks that may be facing trouble.
"Our goal is a well-calibrated range of supervisory options proportionate to the degree of change in a given bank's condition," he said. "It's important that examiners have choices between the extremes of velvet-glove forbearance on the one hand and drastic enforcement actions on the other."
Catching a problem before it becomes too severe, for instance, would allow an issue that might have required an official presentation to a bank's board of directors to be dealt with by an informal visit from an examiner, the OCC official explained.
Mr. Hawke is the third consecutive comptroller to beat the credit-quality drum.
"For several years, OCC examiners have been reporting a troubling incidence of loans with structural weaknesses," he said. "We're seeing loans based on dubious assumptions about the future income and cash-generating capabilities of the borrower."
Mr. Hawke said he understood the pressures bankers face.
"Banks are the victims of their own success," he said. Years of record profits "have raised the bar of success, and bankers feel compelled to jump ever higher if they are to meet investor expectations," he said.
But with an increasing number of lenders chasing a limited number of high-quality borrowers, Mr. Hawke said, "the maintenance of market share must inevitably come at the expense of loan quality."
Bankers, he said, should not cave to investors clamoring for short-term profits. "Banking is not simply a shareholder venture," he said. "It's also a business affected with a public interest."
Project Canary is being led by Vernon Stafford, the OCC's director of core policy development and acting deputy comptroller.
