Kevin J. Bailey is making sure that national banks avoid the mistakes that caused the Daiwa and Barings bank calamities.

As deputy comptroller for core policy, Mr. Bailey is updating the way national bank examiners scrutinize internal controls, a project he expects to complete by yearend. An important new component: The Office of the Comptroller of the Currency will mandate strict separation of duties at national banks' trading desks to prevent rogue traders from causing huge losses.

"The problems that have cropped up are at their root very simple: The trading person was also involved in the settlement function," Mr. Bailey said. "Those responsibilities need to be separated."

Examiners also will ensure that national banks maintain strong, independent internal testing and audit functions. Employees who conduct these tests should have the authority to challenge any business transaction, Mr. Bailey said.

"A lot of this is commonsense risk management that most bankers and examiners should find familiar," Mr. Bailey said.

Despite his focus on risk management, the 38-year-old Mr. Bailey's bailiwick is much broader. He ensures that the agency's examination policies governing capital, accounting, management, and auditing functions keep pace with changes in the national bank system.

Mr. Bailey has seen what happens when bank executives ignore the basic principles of risk management. Like several recent high-level OCC appointments-Wayne Rushton as senior deputy comptroller for bank supervision policy and David Gibbons as deputy comptroller for credit risk- Mr. Bailey has considerable first-hand experience with troubled national banks.

He joined the agency as a lawyer at headquarters, where he served as the head legal expert during the resolution of the Bank of New England, which closed in January 1991.

"There was a crisis every day during that resolution," he said. "It was a very challenging time."

Mr. Bailey helped put together the first cross-guarantee plan used to close a bank, under which Bank of New England's profitable subsidiaries helped prop up the parent company.

He also was instrumental in 1988 in setting up Grant Street National Bank, a special subsidiary into which Mellon Bank Corp. spun off its sour energy and real estate loans. This was the only "good-bank/bad-bank" transaction ever approved by regulators.

"Kevin is clearly able to deal with unique situations and transactions in a way that is beneficial to financial services," said Michael Bleier, Mellon's general counsel. "He is very professional and results-oriented."

"He has tremendous experience in the legal world of structuring capital in troubled bank deals," added Mr. Rushton, Mr. Bailey's boss. "I was really interested in his involvement with solving problems at banks."

Mr. Bailey was promoted in 1991 to executive assistant to Stephen R. Steinbrink, who was then chief of supervision operations. Mr. Bailey served as liaison with the heads of the six OCC districts and often filled in for Mr. Steinbrink at various interagency meetings.

"He had an outstanding ability work with staff at the other agencies, and that isn't easy at times," said Mr. Steinbrink, who retired in March 1996.

In 1994, Mr. Bailey was tapped to be deputy chief national bank examiner, a post that was eliminated after Jimmy Barton, chief examiner, retired in May.

Mr. Bailey will be spending much of this year tinkering with the agency's risk-based exam program. A year after the OCC introduced risk- based exams in December 1995, the agency asked examiners to suggest ways to improve the procedures, which focus more on a bank's internal controls and less on individual loan file reviews.

While Mr. Bailey, one of the architects of the program, declined to detail examiners' recommendations or the changes he is working on, he says the "minor edits" will result in more consistent and precise exams.

"We're aiming for greater precision in defining what the risks are and what should be done on a supervisory basis," he says. "Regardless of who the examiner is, the application of supervision by risk shouldn't change."

Banking has become a family affair for Mr. Bailey. His brother, Michael, is a vice president in Chase Manhattan's Tampa office. His wife, Ellen Starr Bailey, is a banking lawyer at Bracewell & Patterson here.

The two were both hired by the agency in 1986. Ms. Bailey left in March 1990 for a job with Bracewell, where she advises foreign governments who are establishing market economies.

"A lot of what Kevin worked on is considered cutting edge and to be emulated in foreign countries' bank systems," she said. "They are always asking about the good-bank/bad-bank thing, something I happen to understand pretty well."

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