Denial is not a strategy, says OCC chief

Comptroller Dugan warns good communication essential between bankers and regulators to blunt effects of market downturn

WASHINGTON, DC – Evaluation of past regulatory wrongs will determine how supervisors react to the current market downturn. This is according to Comptroller John Dugan, head of the Office of the Comptroller of the Currency (OCC), speaking at the Exchequer Club yesterday.

Strong and mutual lines of communication between regulators and banks were encouraged, as a lesson from the economic downturn in the late 1980s and early 1990s. The comptroller of the currency urged bankers to engage with regulators to head off the worst effects.

“These bankers are reluctant to charge off obviously troubled loans or even to flag problems to their examiners,” he said. “While this resistance to recognising problems at the beginning of an economic downturn may be human nature, it’s not healthy, because denial is not a strategy,” said Dugan.

He hinted that banks which were honest – and honest earlier – about exposures, could expect more help and sympathy from the OCC, adding that if managers looked unable or unwilling to take appropriate actions the OCC would not hesitate to use enforcement powers.

“When we see that bank management is realistically recognising losses and taking tough steps to deal with problems, we are going to give the bank more latitude than we will when we find a management team in denial that forces us to do their work for them.

“There is a natural tendency for banks experiencing difficulties to regard examiners with trepidation and to say as little as possible. I would encourage banks in these circumstances to take exactly the opposite approach – to engage their examiners even more than they might have in good times. Why? Because when problems arise, our examiners need more information, not less, to understand the true dimensions of the bank’s problems – rather than assuming the worst,” said Dugan.