Comptroller of the Currency Eugene Ludwig grabbed headlines recently when be worried aloud about deteriorating credit quality and said the OCC was forming a national credit committee. Two of the OCC's seniormost examiners talk about the panel and the loan quality issue.

[Expanded Picture]Jimmy Barton and Jeri Gilland, Texans and veterans of the Texas banking debacle of the 1980s, are the Office of the Comptroller of the Currency's top credit quality watchdogs. Barton is the OCC's chief national bank examiner and Gilland is assistant chief national bank examiner in charge of supervision policy governing traditional bank activities.

Barton, who has been in his post since May 1994, is also in charge of information resource management, which he says involves the technical side of the business and the way technology interfaces with examinations. He'd love to make the examination process more automated, which he's convinced would reduce the current burden on banks.

Barton and Gilland were interviewed recently at the OCC's headquatters in Washington.

USB: Could you talk about the credit committee? Gene Ludwig made the announcement about it, but has it actually been formed, and have members been named to it?

Gilland: The committee was actually formed in the fall, in late October, and had a first meeting at the end of February. Right now, it's 12 people. It includes six people from our districts, the national bank examiners that we consider to have a high amount of expertise in credit. It includes one of our economists, one of our people from our capital markets policy area, one representative from community development, and there are two of us from the chief's office here in the credit and management policy area. In addition to the six districts, there's one representative from our multinational banking division.

We're planning to meet every quarter at minimum, and we're meeting again this month (June). We will be looking at a variety of issues. We have set each agenda not long before the meeting so that we'll have the most current issues.

USB: Are you the chairperson?

Gilland: Yes. We don't have that designation specifically, but for now I am.

USB: The focus of the committee, as I. understand it, is the largest national banks, where there are resident examiners in place. Is that a function of the fact that they have the largest exposures out there, or is there another reason for selecting them?

Gilland: The committee is actually focused on credit risk, and isn't limited to just the largest banks. A particular project we're working on now relates to the largest banks, but it doesn't preclude us and won't preclude us from considering credit risk, possibly in smaller banks as well.

USB: How are you getting reports? Is there something that's coming up through the examiners who are actually there? Is it on paper?

Gilland: we are in the process of doing a survey that we gave to our examiners who examined the roughly 40 largest banks. We asked particular survey questions to get at a variety of things, particularly those items mentioned in the Comptroller's speech, and we asked our examiners to complete it rather than the banks because they have the knowledge of the kinds of things we're looking for. And the committee will act on that this month when we meet, analyzing and consolidating that information to provide something back to our senior management.

USB: Is part of this really sharing information, making sure that bank managements are aware of the examiners' thinking?

Gilland: We hope we can provide some information back to the banks, at least to those who participated in the survey. We'll try to do that.

USB: So would the examiners actually be monitoring the portfolios in a different way than they have been over the last few years?

Gilland: Not as a result of this, no.

Barton: Our goal is to understand better the comments about credit quality from individual industry participants. They have been critical of each other, and all of that is well and good--it gives some anecdotal information. But it doesn't give us much trend information. It's more helpful to know across a horizontal cut of the banks what's actually going on.

USB: Since Ludwig made his comments, has there been, even anecdotally, any change or any potential erosion of the standards that you bear about?

Barton: Actually, in talking to various bankers and others around the country as I've traveled, I'm not hearing much different from what we heard last year. I am hearing more about how some bankers are concerned about the extent of the growth in the loan portfolios, and when you look at the statistics, it's evident that there is some very high growth. And that is of concern to us.

USB: I read something about what was called the shared national credit program, and it was described as a joint agency program. Are there other regulators involved, and how's that been working?

Barton: Actually, the shared national credit program goes back to the early to mid-1980s, and it consists of all large credits over $20 million which are shared by more than two institutions. So they're the large syndications. They make up about 30% of commercial credit in the U.S. They are reviewed annually during the latter part of April and the month of May. It's primarily a large-bank review because some small banks will have a few credits, but not enough for us to send in examiner teams.

The teams tend to be mixtures of OCC employees with Federal Reserve) and FDIC employees. There are approximately 6,000 shared national credits that are reviewed during that period. We do about 3,000 in our national banks, and the Fed does about 3,000.

Over the years, that information has been very helpful to this agency and the Fed and the FDIC. We have not, as a matter of course, furnished that as public information. It tells you about the level of criticism of those particular credits... The trend last year was considerable improvement in those credits, and anecdotally this year, it seems that there is not any material deterioration.

USB: What do these examiners in this process you're talking about look at? Are they looking at migration or delinquency rates or bow the credit holds up over time?

Barton: Well, the simple answer is that we review these on the same basis we would review a credit within the context of the regular examination of that institution. We go through and look at all those factors, from collateral to the status of the credit as far as its terms, to the covenants.

USB: You hear lots of bankely talk about issues like standardization and homogeneity in the ways examiners look at them. Has the OCC put a lot of resources into credit training in recent years?

Gilland: We have two brand new credit schools, one for what we call our non-commissioned examiners, the less experienced examiners, and one for more experienced examiners.

USB: Is this largely still instructor-based training? Is there a time where it can go to much more of an interactive, computer-based training?

Barton: Actually, the organization has been working on using technology to help us in credit analysis. There are some basic credit information analyses that go across the entire spectrum of credit, and then there's some of the specialty stuff, like cable, in which there is some actual statistical analysis and other information that is part of the process.... We're working on those tools now, but we're in the early stages of trying to get that developed. And the banks have gone a long way. There's some very good pieces of software out there that several of the larger ones are considering that really kind of fascinate me, such as the automated credit file. It gives you all the information that you would want to do that analysis, it does the comparisons for you.

USB: I guess it makes sense for you to be able to piggyback on what the banks are doing. If they have an automated credit file and could report in a form that your people could read, you wouldn't have to go into the banks.

Barton: And we would like to do that. If we can read off that credit file without going and requesting the information that requires the bank to build the file for us or to have someone go get the files and handle them, we can reduce the burden on the bank. There may be some short-term cost in asking the bank to put files in electronic form that we can access, but I think, overall, we can reduce the burden on the bank if they're willing to participate with us in this kind of technological conversion. We would, of course, still have to go into the banks.

USB: Have you gotten any feedback from the banks about their willingness to participate in this technology effort?

Barton: All the banks I've talked to are excited about technology, and all of the ones that I have talked to--and these are primarily large banks that have moved this along more rapidly--have been very interested in giving us the information. But we have to get ready to take that information and use it, and we're not quite at that point yet. Of course, I would expect the industry to advance this a little faster.

USB: I was struck by the remarks that Gene Ludwig made at this point in the credit cycle. Recession is certainly a long way from most people's minds. Doesn't raising that redflag now seem a little unusual? Do you recall any precedent going back in your career?

Barton: Actually, there is some history. When you go back during the '80s, there were some in our organization who raised the red flag about real estate, but I guess I would have to say we didn't push that issue as hard as we probably should have, and I think that's why you see us pushing it now. Hopefully we learned our lesson that these good times are the times when you watch for concentrations of credit and problems in industries and start talking about those and talking about risk controls--not after the banks have overexposed themselves and we're in a downturn.... We're talking about issues now as opposed to waiting until it's past the point of no return.

USB: Certainly there isn't much appetite out there for doing a lot of real estate loans in the way people did, or LBO loans, so are things a lot more diversified in terms of the concentration of risk?

Barton: We continue to worry about real estate. It is still the largest exposure of the banking industry. I don't think we're alarmists yet, but people need to be aware that they need to have those credits underwritten and priced right.

There are articles in the press about credit cards, talking about the exposure of individuals to credit cards. And Jeri and her people have recently done some horizontal work in that area.

USB: What kinds of concerns are there in the credit card area?

Gilland: Well, the outstandings have increased, and there's the sense that it's preferable for the credit card issuers to have their customers carry large balances. They do things that encourage that, both their solicitations and their payment choices.

Barton: One of the things that Gene (Ludwig) has been very much involved in, in this organization, is the debate about what he calls "best practices." And one of the things that we did in credit cards was to try to focus on what were the best practices in the industry and who were the outliers, and how we might deal with the types of exposures (the outliers) create for themselves.

He thought it was important, and I agree with him. You need to understand who the best players are, and then you need to understand how the others are different and whether or not the risks they've undertaken are excessive.

Gilland: In this process that we just went through, we examined our 15 largest national bank credit card issuers. That included training of a core group of examiners. We had a lot of examiners with a lot of expertise... and now those examiners are out there and are teaching others. That's one of the benefits of this kind of process.

USB: I get a sense from hearing analysts and others that one of the big concerns out there is that as the economy slows, people are trying to grow loans a little too quickly. Is loan growth that's too fast a symptom of trouble?

Barton: I certainly think that loan growth is a red flag, but in and of itself, without considering other characteristics of the institution, you can't say loan growth is bad. The institution may grow very well, its loan portfolio may be of a high quality. What you need to look at is the risk control in the institution over the exposures that it's taken and its capital and earnings stream.

USB: Is there any area of the country at this point that is of particular concern?

Barton: I know you always get yourself in trouble by generalizations, but I can't really say that there's a part of the country that I'm terribly worried about. I can't tell you that there's an area of the country right now that shows the kind of systemic weakness we had in the Southwest, in the Northeast, in the Southeast during the last 10 years.

USB: You're both Texans. Is there something about being a Texan that makes for a good bank examiner?

Barton: (Laughs) I don't think there's any particular relevance other than the fact that Jeri and I grew up in an unusual banking environment. it got overbuilt and overexposed to a couple of industries. That gave us close-up experience that is just invaluable. We went through oil and gas and real estate in the Southwest, and that was a very valuable experience for both of us.

It's good to have Jeri here with that kind of experience in charge of credit risk. That's really the heart of banking. We can talk a lot about derivatives and we can talk a lot about other things, but the big exposures on the balance sheet are credit risks.

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