OCC's Cautious Crusader against Sloppy Credit

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Like a preacher at a country revival, Julie L. Williams is trying to save bankers from their sins.

Though the soft-spoken acting comptroller of the currency is not exactly spouting hellfire and damnation, the message is clear: Repent or face a day of reckoning much like the real estate crisis of the 1980s.

Over the last few weeks Ms. Williams has intensified the Office of the Comptroller of the Currency's crusade against eroding loan underwriting standards by ordering examiners to dig deeper into national bank portfolios and introducing new guidelines to help them root out high-risk loans.

"If they don't abate, these problems could become very significant," Ms. Williams said in a recent interview.

Banks must reject lending opportunities with margins that do not adequately compensate for the risk being taken, she said. "The spreads available today are very tight, so you have a combination of problems," she explained. "Banks are taking on more risk and not getting paid for it."

The latest moves follow three years of warnings from regulators including Ms. Williams and the previous comptroller, Eugene A. Ludwig. It is unclear, however, whether her recent homilies will be enough to make bankers change their ways. After all, Ms. Williams has carefully avoided any talk of the punitive measures in store for banks that do not shape up.

She contends specific threats could scare banks and spark a credit crunch. "We are shifting gears. But it is also important that we don't go from first to fifth gear. That could create greater problems than the ones we currently have," she said.

However, Ms. Williams acknowledged that she is disappointed with the industry's response to her repeated warnings. In meetings with examiners in recent months bankers have generally denied that their own standards have slipped, and have blamed the industry trend on irresponsible competitors.

But when examiners uncover risky loans, reckless bankers won't be able to blame crosstown rivals any longer, Ms. Williams said.

"It becomes much more difficult to ignore concerns when an individual bank has been presented with specific transactions by examiners," she said.

Ms. Williams ticked off a number of troubling trends plaguing the industry:

Maturities are being extended, increasing the chance that a borrower could fall on hard times and not be able to repay.

Credits have fewer covenants, and banks are often reluctant to enforce the requirements that do exist.

Many loans are designed to be repaid by uncertain future refinancings or equity offerings, not traditional debt service. …