WASHINGTON — Banks shouldn't go to extremes to make up for declining earnings, Comptroller of the Currency Thomas Curry said Friday.

Speaking at the 8th Annual Community Bankers Symposium in Chicago, Curry noted that regulators are encouraging small institutions to improve their enterprise risk management systems. Instead, many banks have either shrunk assets to improve regulatory ratios or offered lower loan pricing to boost revenue. These opposite extremes are concerning to regulators.

"For all the improvements we're seeing, creditworthy borrowers who want loans are still hard to find," Curry said. "Reaching out on the risk spectrum for earnings can be problematic."

He reiterated that too many banks continue to ease up on operational risk.

"We have seen institutions cutting back on operating controls to enhance income, and this is a cause for concern," he said.

Curry encouraged bankers to use a "proactive" risk culture by "breaking down the silos" between departments when it comes to developing new products and services.

He also emphasized that banks should stress test themselves, even though it's not required for smaller institutions.

"What we really want to see is that your banks do consider some form of stress testing or sensitivity analysis of your key loan portfolios on at least an annual basis," he said, though cautioning that they do not need big-bank sophisticated models or a consultant.

To help smaller banks, Curry pointed to three key areas of risk management that the agency is looking for: the aftereffects of the housing boom-to-bust cycle, increasing revenues in a slow-growth economy and the potential to take excessive risks to improve profits.

Of all the risks, the greatest concern for Curry was operational risk, especially in upholding a good reputation with customers.

"I doubt that any single area of risk management has occupied as much of my time since I became comptroller in April as operational risk," Curry said. "From the foreclosure processing mess to fair lending violations to credit card marketing issues, the risk of loss that results from the failures of people, processes, systems and external events has become a significant safety and soundness issue."

Curry acknowledged that most of those issues are big bank problems. But he cautioned community banks to be "vigilant" in operational risk, particularly when it involves treating customers fairly.

"Community banks and thrifts play a vital role in supporting local economies throughout the country, and America's families and communities can't be successful unless you are," he said.  "Our goal in promoting sound risk management is to help ensure that the nation's smaller banks and thrifts remain healthy, profitable, and strong enough to serve communities across the United States."

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