Comptroller of the Currency Eugene A. Ludwig continued his assault on deteriorating commercial lending standards Tuesday, urging banks to shore up portfolios while the economy is strong.

"The consequences of eased standards are likely to be readily and painfully apparent when the economy weakens," Mr. Ludwig warned in a letter being sent to chief executives at banks.

The letter was prompted by the agency's third annual underwriting survey, which showed that a majority of banks eased loan standards this year.

To head off industrywide problems, OCC examiners are meeting this month with senior management at the 32 largest national banks to discuss underwriting standards. Examiners will meet with top officials at the more than 2,600 other national banks by the end of March.

The agency also is planning to release in the first quarter new exam procedures, which will focus on underwriting criteria. Also, examiners will get additional training in credit risk management.

Mr. Ludwig criticized some banks for reducing the number of officials who monitor credit risk. Instead they should invest in "strong credit control and monitoring systems" that identify weaknesses in specific credits and industries before the bank takes a loss, he said.

Reforming underwriting criteria is a long-term project; OCC officials said Tuesday that they do not expect the agency's new policies to affect bank balance sheets for at least 18 months.

Underwriting criteria have come under increasing scrutiny by regulators. For instance, the Federal Reserve Board's recent senior loan officer surveys and its periodic reports on the country's economic health have detected a continued deterioration in terms and rates on commercial credits.

According to the OCC's underwriting survey, banks have moved away from the conservative practices that dominated the industry just a year ago.

Nearly 60% of the banks had eased standards in one or more of six categories of commercial credit. The most prevalent changes were lower rates and fees, followed by looser guarantees. More banks also were extending maturities, examiners found.

Most bankers agreed that lending portfolios had deteriorated.

"There are some banks that have been very aggressive," said Paul M. Dorfman, executive vice president at BankAmerica Corp. and chairman of Robert Morris Associates. "Are they likely to encounter difficulty? Yes."

"We've seen some pretty crazy deals," said Kevin M. Blakely, executive vice president for risk management at KeyCorp. "Pricing continues to get thinner, and payment terms are getting stretched out more than we would like."

Smart bankers, executives say, will walk away from the risky practices.

"We try to be competitive," said Peter M. Martin, president and chief operating officer at Provident Bankshares, Baltimore. "But the bottom line is we're not making as many loans as we'd like."

David Gibbons, OCC deputy comptroller for credit risk, said competition from nonbank lenders was fueling the deterioration in standards. "There are only so many loans to be made," he said. "More and more banks are willing to negotiate away many loan covenants."

Among the six types of commercial loans covered in the study, syndicated credits were most likely to show increased risk. But deteriorating standards were also found in commercial real estate, middle-market, small- business, and international lending. Agricultural loans were the only segment that did not show more risk.

Mr. Gibbons said he was also concerned about deterioration in retail lending standards. Increasing risk was found in 38% of home equity portfolios and in 13% of residential real estate portfolios.

Under pressure from regulators, lenders have tightened other consumer lending practices. For instance, 59% of the banks had raised credit card standards during the past year.

The survey was based on responses from chief examiners at institutions owned by the country's 80 largest bank holding companies. The aggregate loan portfolio of the 364 banks covered by the survey was approximately $1.5 trillion, or 84% of all outstanding loans at national banks.

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