LOS ANGELES – With fear running high in global financial markets, U.S. banks are feeling the effects.
The KBW Bank Index is down 19% so far this year,
While Comptroller Thomas Curry acknowledges the challenging environment, however, he argues the system is far more resilient after recent reforms.
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As the industry turns to online-only banking and partnerships with third-party retail distributors, it's getting harder to use geographical boundaries to define the communities that banks serve. That's why the CRA needs an update.
October 1 -
Credit risk, interest rate risk and cybersecurity concerns pose growing risks to banks in the first half of 2016, according to a semiannual risk report issued Wednesday by the Office of the Comptroller of the Currency.
December 16 -
Comptroller of the Currency Thomas Curry said banks could consider loan-to-value ratios above 90% to help revitalize areas hurt by the housing crisis.
September 9
"I do think that this is an unsettled environment currently," Curry said this week during an interview with American Banker. "I think our focus as prudential regulators is really on making sure that our supervised entities are prepared for all environments. So I think it's important to look at where we are today as opposed to where we were in 2007, 2008."
Curry cited higher industrywide capital levels, improved liquidity and more robust loss provisioning as reasons to be more confident in the industry's ability to weather a storm.
"Whatever happens with the economy," he said, "we have a much stronger banking industry."
Curry was in Los Angeles for a community reinvestment conference co-sponsored by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Federal Reserve Bank of San Francisco.
During the interview and a separate speech, he spoke about a new OCC effort to spur economic development in depressed cities, his agency's warnings on the deteriorating quality of certain types of loans, and what he would like to accomplish during the rest of his tenure. Following are highlights:
Spurring Investment in Cities with Weak Housing Markets
During his speech, Curry said that the OCC expects to issue guidance in the coming months that is intended to jump-start the moribund mortgage markets in certain cities with low home values.
Curry said that this initiative,
"The limited number of home sales there can make it difficult to find comparable sales needed for valuation of a property," Curry said. "Additionally, area home values may be so low that the cost to purchase a property and make needed repairs often exceeds the post-renovation market values."
Under current regulatory guidelines, banks are not supposed to write single-family mortgages that exceed 90% of the property's value, unless the loan has mortgage insurance or some other form of support.
Curry said that the new guidance will allow for exceptions on a case-by-case basis in communities that have been officially targeted for revitalization.
Reform of the Community Reinvestment Act
Mobile phones have changed the way that many Americans access banking services, and now
When he was asked whether the community reinvestment law needs to be updated, Curry was noncommittal. "I think what we're trying to do is really work off the existing statute and to adapt it as much as possible," he said.
The CRA, enacted in 1977, requires banks to make loans to low- and moderate-income borrowers in geographic areas where they have their headquarters, branches or ATMs. Those requirements seem largely irrelevant for today's branchless banks.
"I think there's both promise and also potential pitfalls with electronic delivery systems, as opposed to geography-based brick-and-mortar branches," Curry said. "How do low- and moderate-income communities fare? And do we need to adapt either the supervisory approach or ultimately look at statutory modifications?"
Credit Quality
During Curry's four years at the OCC, the agency has made a concerted effort to sound alarm bells about asset classes where banks are weakening their standards.
That louder approach emerged after the OCC and other banking regulators faced criticism for failing to speak out publicly regarding the decay in mortgage underwriting standards a decade ago.
In recent OCC reports, energy loans, subprime auto loans, and multifamily real estate loans have all been flagged as areas of concern. During the interview, Curry reiterated that banks have been taking greater risks by reaching for higher-yielding investments at a time when interest rates are low.
"There's value in early identification of potential emerging threats. And that's something we've paid a lot of attention to, and been vocal on where we see potential weaknesses," he said.
Shadow Banking
Since May 2013, the OCC and other federal banking agencies have been pressuring the institutions they regulate to tighten their underwriting standards on leveraged loans. Such loans carry high interest rates and are often used to finance the purchase of companies.
Critics argue that the crackdown has had the unintended effect of pushing many of the loans outside of the regulated banking system. But Curry is unapologetic.
"My primary concern and job duty is to really make sure that … national banks and federal thrifts are operating in a safe and sound manner," he said in response to a question about the impact of regulatory guidance on leveraged loans.
"And the underlying philosophy with the leveraged lending guidance is that regulated banking entities should not be making substandard loans from day one," Curry added. "I think that over time we've seen the behavior change in the regulated space."
Cybersecurity
Another focus of the OCC under Curry's leadership has been banks' vulnerability to cyberattacks.
When asked whether he is more or less worried than he was a year ago, Curry responded, "I think it's a state of constant worry."
He theorized that a massive enough security breach could jeopardize the solvency of a smaller bank, and argued that an incident at a major bank could undermine public confidence in the entire banking system.
"The first step is to have the banks be the first line of defense," Curry said. "Then the value of the regulatory system, at least in the banking sector, is to be able to supplement that and get a horizontal view of what's going on in the entire industry."
Looking Ahead
Curry was sworn in as comptroller in April 2012, which means he has 14 months left in his five-year term. He still travels to Washington each week from his home in Massachusetts, where he served as banking commissioner for more than a decade.
Asked about his top remaining priorities at the OCC, Curry mentioned the need for the agency to finish its rule-writing responsibilities under the Dodd-Frank Act.
He also spoke about working to ensure that the OCC has a top-notch staff – not a sexy topic but one that undergirds all of the agency's work.
Referring to the OCC's need to attract outstanding employees, Curry paraphrased President John F. Kennedy, saying: "You fix the roof before it rains."
