Dugan: more US banks will fail in 2009

There were around 25 bank failures in the US in 2008, he noted, mostly among smaller institutions. "I think we're likely to see that pace pick up in the next 12 months, particularly on the smaller side, because credit losses are likely to increase and it is harder for a smaller institution to withstand that," he said.

In response, he said, the Office of the Comptroller of the Currency (OCC) would work with institutions undergoing difficulties, encouraging them to raise capital and finding healthier suitors to buy firms. The OCC would also ensure banks didn't take excessive risks "as a way to dig themselves out of the hole", he said.

The OCC had a range of options at its disposal, according to Dugan, although he conceded its task had recently become tougher as a result of market turmoil.

"It has been complicated now by the credit markets getting worse and it being harder to raise capital. One of the good things we did was to strongly encourage our institutions to raise a lot of capital in the past year," he said. OCC-regulated banks have raised about $150 billion over the past 12-15 months, Dugan noted.

Elsewhere, remarking on the broader financial crisis, he criticised the pro-cyclical effects of mark-to-market accounting. "In illiquid markets, with illiquid assets, fair-value accounting just doesn't work very well and is very pro-cyclical. There are places where it doesn't really make sense." As a result, Dugan said, the spread of mark-to-market for assets held for purposes other than trading should stop.

On credit ratings, he insisted there were still areas of securitisation where ratings were effective, despite their underestimation of losses stemming from US subprime mortgages. This was something regulators should be mindful of when revisiting capital adequacy rules, which have been criticised for over-relying on credit ratings.

"To ignore credit ratings altogether is to throw the baby out with the bathwater. While all regulators should re-examine the extent to which they rely on credit ratings in their systems, it would be an unwise course of action to get rid of that reliance altogether," he said.

He also expressed sympathy for rating agencies, saying the criticism they had endured in structured credit had led them to become too conservative elsewhere. "Credit rating agencies themselves have been knocked on their heels in the wake of the crisis and have had to make many changes - and I feel they are going too far in the opposite direction now," said Dugan.

The full interview appears in the January 2009 edition of Risk.