Easier Exams? Bankers Say It Just Isn't True

Despite the lip service in Washington about an easing of bank examination standards, there is mounting evidence that the watchdogs are being as tough as ever.

"I'm not a regulator basher, but regulators are applying badcase scenarios to places that may not be exhibiting bad cases," said Robert E. Greene, an executive vice president at First Interstate Bancorp and president-elect of Robert Morris Associates, the trade group for commercial lenders.

"They're applying the rigorous standards used for the major banks and applying them to the rest of the industry. Not all economies are broken like New England."

While it is unclear whether standards have actually been tightened, regulators appear to be following the most conservative guidelines and reviewing a broader range of loans. That could have a negative impact on the third-quarter earnings of banks that have not aggressively reserved against potential problems, analysts say.

"We believe more conservative valuation assumptions are being employed," Thomas H. Hanley, the chief banking analyst at Salomon Brothers Inc., wrote in a report last month after regulators forced Wells Fargo & Co. to set aside $350 million in reserves.

"If the standard truly is tightening, other banks likely will face similar unpleasant surprises," he wrote.

Officials Defend Practices

Government officials defend their regulatory practices, saying they reflect the worsening economic climate. A top official at the Office of the Comptroller of Currency, which regulates nationally chartered banks, stressed that standards used by examiners in the field have not changed.

Rather, said Jimmy Barton, deputy Comptroller for multinational banking, "credits are under economic stress, and they're beginning to show weaknesses. It's not a matter that standards are different. . . . The underlying credits are changing."

Examinations by the Comptroller's office are broader this year. The agency has changed the way it examines banks' portfolios by reviewing at least 30% of all loans held by national banks rather than employing exams targeted to specific classifications, such as real estate. If problems arise, the agency may expand the review to a larger share of a bank's portfolio, a spokeswoman said.

Shared Credits Reviewed

Mr. Barton acknowledged that more banks are being reviewed under the Shared National Credit Examination, a joint regulatory examination of all nationally syndicated loans, because a greater number of banks hold the widely syndicated loans.

The Shared National Credit Examination is complete for most agent banks. Final evaluations will be sent to holders of the loans sometime this month.

Mr. Barton denied allegations by Wells officials that the agency was looking two to three years out in concluding whether there is "doubt" that a loan can be paid.

"In my discussions with examiners, I do not believe they are looking that far down the road," he said.

There are no set rules to determine when a loan is doubtful. And the Comptroller's office has yet to publish final revisions of its circular 201, which gives banks road maps to determine when a loan is impaired and how much to reserve against it.

Mr. Barton acknowledged there is no specific standard or definition for regulators to follow. "Regulators are asked to use judgment," he said.

Frustrating Discrepancy

Bankers say they are frustrated by the discrepancy between what Washington regulators say and what field representatives do. Some bankers charge that regional regulators have not taken their cue from Washington to take bankers' feet out of the fire.

"The Comptroller says it has eased up in its approach, but without exception I'd say it hasn't been applied practically yet," said Joseph W. May, an executive vice president at Manufacturers National Bank of Detroit.

Added another banker with a sizable portfolio of loans to highly leverage companies: "The regulators have given lip service to forbearance, but in fact they've been more brutal than ever."

Mr. Barton said "We have tried our best to be consistent nationwide," but acknowledged that the agency "is very concerned about that."

He added that field representatives are being brought in to Washington to discuss both individual credits and applying guidelines consistently.

Ultimately, some bankers acknowledge that the tough stance taken by regulators is warranted given the savings and loan bailout and the condition of the industry.

"It's tough but fair," said William J. Rossman, president and chief executive of Mid-State Bank and Trust, Altoona, Pa.

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