Bank Regulators' Strong Words About Credit Quality

Judging by the tone of their remarks on credit quality, the regulators appear to be getting quite worried.

Breaking the Banks
Using Bank Regulators as a Contrarian Indicator

The loudest recent warning came on Oct. 5 from the Office of the Comptroller of the Currency's chief counsel, Julie Williams. She said that an OCC survey of syndicated loans (large credits to corporations that are shared among several lenders) showed that there was an "increasing portfolio risk building up in the banking system as a result of weakened underwriting and risk-selection standards."

Then, in an Oct. 14 speech that really hit bank stocks, Fed Chairman Alan Greenspan argued that financial institutions could find that "they are underestimating the credit risk of individual loans" by fixing too much importance on asset values, which, while currently buoyant, could fall.

And for good measure, here's a couple more anxious-sounding remarks from Washington.

• "Ongoing supervisory monitoring of lending practices at banks of all sizes ... provides evidence that banks in some cases have relaxed their credit discipline in certain key areas." -- Sept. 28 letter from Richard Spillenkothen, director of the Fed's division of banking supervision and regulation.

• "I remain concerned about the quantity and quality of credit risk among national banks. ... For commercial loans, the cumulative effect of the past four years of easing standards is to expose banks to increased risk of loss in the event of default." -- comments from OCC head John Hawke in a Sept. 30 OCC press release.

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