Comptroller of the Currency Eugene A. Ludwig, issuing a warning to national banks, said on Tuesday that the industry's obsession with cost cutting is jeopardizing its ability to manage risk.
"We have seen some institutions considering cuts that could strike close to the muscle and bone of sound business practice," Mr. Ludwig said at a Bank Administration Institute conference in New York.
"I am concerned ... that a careless wielding of budget axes could threaten the ability of banks to guard against breaches of fundamental controls."
Mr. Ludwig also noted that some banks are reluctant to invest in additional systems to manage the risks posed by new activities.
While only a few institutions are headed down this road, Mr. Ludwig said he is worried that a trend may be developing. While the industry is hugely profitable, Mr. Ludwig told bankers not to become complacent about risk.
"Banks have a tendency to focus less on internal controls during good times, and the failure to keep an eye on this fundamental part of the business has often led to serious problems," he noted.
Mr. Ludwig recommended that banks maintain strong, independent internal testing and audit functions. Employees that conduct these tests should have the authority to "challenge any business transaction - even one involving so-called superstar performers," he said.
In addition, as banks merge and acquire new offices, they must ensure that the information systems in different locations are compatible, Mr. Ludwig said. Otherwise, it will be difficult to gain a comprehensive picture of an institution's risk.
"Trying to manage a business in this day and age without the appropriate information is like flying a jet without instruments - you may be lucky for a while, but you are flirting with disaster."
In a session after Mr. Ludwig's speech, panelists said investors may force the industry to adopt uniform disclosures of risk management practices. (See story on page 25.)