Departing Comptroller Urges Loan Quality Review

The Office of the Comptroller of the Currency issued guidelines Tuesday nudging national banks to take a comprehensive look at the risks posed by the loans on their books.

"It's just as crucial for banks to manage their portfolios as a whole as it is to review the quality of each individual loan," said Comptroller of the Currency Eugene A. Ludwig.

Mr. Ludwig has railed against sloppy underwriting standards for two years. Poor portfolio management is causing problems at "70% of the banks with which we have concerns," he said Tuesday.

"Loan concentrations-whether energy loans in the Southwest, real estate loans in the Northeast, or too many loans in one geographic area-have been a major factor in bank failures for the past two decades," Mr. Ludwig said.

The 97-page document is the comptroller's last major initiative before his five-year term ends Friday. Though the guidance applies to all national banks, large institutions will be affected most.

Bankers reacted positively.

"We need the comptroller's guidance because there is a pretty wide disparity in the quality of portfolio management," said Malcolm T. Murray Jr., chief credit officer at First Union Corp. "The level of diligence during good times will determine the health of the industry in bad times."

Many big banks will be expected to spend several million dollars a year on computer systems that can run complex "stress tests" to determine how portfolios will be affected by a wide variety of factors such as lower prices in borrowers' key industries, economic downturns, and interest rate changes.

But the extra expense is necessary, said Paul McGloin, executive vice president at CoreStates Bank in Philadelphia.

"Banks need to grow the technology side of their organizations to find out how portfolios should be reconciled in order to prepare for economic downturns or geographic risks," Mr. McGloin said.

He noted that a recent study by Robert Morris Associates and First Manhattan Consulting Group found that only four of the 64 largest North American banks were ranked as "advanced practitioners" of portfolio risk management.

To meet the guidelines, banks also will have to invest in data base systems capable of tracking key factors such as loans to one industry and geographic concentrations. "People will have to pony up," said David Gibbons, deputy comptroller for credit risk. "You can't do this without good information."

Lee B. Murphey, chief credit officer at First Liberty Bank, a $1.3 billion-asset institution in Macon, Ga., agreed. "Even for community banks, it's not good enough anymore for a bank simply to know their customers," he said. "Portfolio management is more complex than ever."

The guidelines direct national banks to determine the appropriate mix of loans and set growth limits on loans to the same industry or credits with similar types of collateral. (Unlike rules, compliance with guidelines is not mandatory).

Banks should also track how many loans violated its underwriting standards. "Historically banks with problems have had a high number of exceptions," Mr. Gibbons said.

Banks that take big risks should be prepared to move quicker than other banks to work out or write off problem loans, he added.

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