WASHINGTON — Don't look for the banking industry's problems to abate anytime soon.

A leading federal bank regulator offered a gloomy view of the industry's health and vowed Wednesday that regulators won't hesitate to crack down on troubled lenders.

In remarks to the American Bankers Association, Comptroller of the Currency John Dugan acknowledged these are tough times for banks, with 702 banks — nearly 9% of the industry — defined as troubled. He told bankers that regulators "simply cannot turn a blind eye" to problems and have learned the lesson that looking the other way will only compound losses.

Nearly 200 banks have failed in the past two years, at a cost of nearly $58 billion, "and we may not be even halfway through," said Dugan.

He promised that regulators will promptly shutter troubled lenders, saying the forbearance offered to shaky savings and loans during the 1980s only delayed the inevitable and proved to be "disastrous."

Dugan said his agency was one of the first to raise concerns about banks making too many loans to commercial real estate developers, a stance he said is drawing less criticism now that some commercial real estate loans are souring.

Bankers have complained that regulators are being far too tough now, and Dugan said "we hear that message loud and clear," and need to balance it against complaints that regulators aren't moving fast enough to close troubled banks.

He said the OCC is telling its bank examiners not to be tougher than they need to be and to use their best judgment, and he urged bankers who think they've been misjudged to complain to the agency's ombudsman.

Turning to Congress, Dugan raised concerns that a financial regulatory overhaul unveiled this week by Senate Banking Committee Chairman Christopher Dodd (D-Conn.), would undercut federal oversight and favor consumer protection over financial stability.

Dodd's approach to federal supremacy over state bank regulators appears to set a higher standard that would be harder to invoke, and gives state regulators new authority to claim damages from any financial institution, including a nationally chartered bank, Dugan complained.

"Those are steps in the wrong direction," Dugan told the bankers.

The comptroller of the currency oversees nationally chartered banks and has long asserted that federal regulators and federal regulations should pre-empt states' efforts.

Dugan also faulted Dodd's stance on consumer protection, saying that in cases where the goal of consumer protection conflicts with ensuring the safety and soundness of the financial system, the bill would favor consumer protection.

"I think that's backwards," said Dugan. "I think that the safety and soundness regime should trump the other."

But Dugan applauded Dodd for proposing the creation of a new consumer protection agency, saying strong federal rules that bring more bank-like regulation to non-bank firms is needed, and said other portions of Dodd's bill, including its tackling of banks being deemed "too big to fail" are helpful.

Dugan took a mixed view of recent efforts by the Financial Accounting Standards Board on bank accounting, objecting to a push for an incurred loss model that he said would preclude banks from increasing loan loss reserves until losses start mounting.

Banks and bank regulators favor a more flexible standard and Dugan said it appears as if FASB is open to revisiting the matter. But he blasted the FASB for mulling a proposal on applying fair value accounting for bank loans, saying that would be a mistake.

While Dugan said it makes sense to use a mark-to-market model for traded assets, he said the so-called fair-value approach shouldn't be applied to bank loans.

"I hope they don't go in this direction," said Dugan.

He said if the Norwalk, Conn.-based FASB sticks to its guns and issues such a proposal in coming weeks, his agency will argue against it on grounds that it could harm financial safety and soundness.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.