WASHINGTON -- Chief executives from 25 of the largest banks say credit risk is the major hazard facing their industry.
According to a report done for the Comptroller of the Currency's office, all but one of the 25 executives believe loan underwriting standards are eroding.
"Large bank senior officers...were found to be relatively pessimistic about the future," the report found. "Another period of stress for commercial banks lies ahead."
The comptroller hired ISD/Shaw Inc., a consulting firm here, to interview bank CEOs confidentially. One goal was to find out how the executives perceive the agency. (See accompanying story.)
Another was to identify emerging risks.
While the large bank CEOs told ISD/Shaw President Karen Shaw that their institution was holding the line on loan pricing and terms, they said their competitors are making commercial loans at lower prices, under looser terms, and with more liberal covenants.
Comptroller of the Currency Eugene A. Ludwig agreed, warning in an interview this week that, "There has absolutely been a slippage in credit underwriting and pricing."
Mr. Ludwig and Federal Reserve Board Chairman Alan Greenspan have warned bankers a number of times recently against repeating the lending mistakes of the 1980s.
"Credit risk absolutely concerns me," Mr. Ludwig said. But he added: "We have not seen it yet...get into the unacceptable range."
Interestingly, the bank CEOs are not worried about the risk posed by the industry's ballooning derivatives business.
But the executives did use derivatives to illustrate a criticism that regulators have an unrealistic expectation of directors' involvement in risk management.
"Bankers interviewed generally opposed any requirements that directors be expected to have anything more than a cursory understanding of derivatives," according to the report.
"Most bankers were willing to exchange increased scrutiny and criticism of management in return for a reduced load for directors."
Mr. Ludwig, in the interview, was sympathetic but not specific. "I've been very concerned about the burden on bank directors," he said. "This is an area that needs to be attended to."
The report also cited capital standards as a third area of concern to the large-bank executives.
Existing capital standards are too complex, the bankers complained. In addition, plans to incorporate interest rate exposure to risk-based capital rules will hurt the industry's competitiveness, the report warned.
Two bankers urged a return to a straight capital-to-assets leverage ratio.
"While such an approach is crude, it may not expose institutions and regulators to unanticipated competitive or portfolio incentives that could result from complex, possibly conflicting, risk-based capital standards," the report said.
Finally, the Shaw report identifies mutual fund sales as a future potential risk. Bankers are not worried about losing money on mutual funds, but rather what the effect of entering the business will have on the public's perception of the industry.
The executives also are nervous about the reaction on Capitol Hill as banks gain a larger share of the mutual fund business.
Bank CEOs' Concerns
Declining credit standards
Intensifying demands on directors
Complicated capital rules
Damage to reputation by mutual funds sales