OCC: Banks Face Bad Debts Beyond Subprime

MoneyNews
Tuesday, March 4, 2008

WASHINGTON -- U.S. banks should prepare for rising bad debts from credit cards, home equity loans and commercial real estate lending in addition to subprime mortgages, the comptroller of the currency told lawmakers Tuesday.
The subprime problems coupled with a slowdown in the U.S. economy have strained many banks' resources, John Dugan said in prepared testimony for a Senate Banking Committee hearing.

Credit card loans are a concern, said Dugan, whose office regulates national banks.

"Although credit card earnings have been fairly robust and portfolios are currently strong, we have a heightened level of concern in this area, even before the numbers confirm any significant deterioration," he said.

Bank losses on credit card delinquencies are running at about 5 percent, below the long-term industry average of 5.5 percent, Dugan said.

"But losses may migrate to that rate or higher in 2008," he said. "These trends require that we continue to devote attention to this type of credit."

Regulators generally require U.S. banks to charge off a credit card loan when the loan is 180 days past due.

The weakening U.S. economy will also bring more losses on home equity loans, Dugan said.

"We expect bank losses from home equity loans to continue to escalate as, unlike first mortgages, these assets are predominantly held on banks' balance sheets," he said.

Commercial real estate loans is another area of concern, particularly at smaller banks.

Regulators have pressed banks to expand their reviews of commercial real estate risks by looking at such things as vacancy rates, lease rates and updated appraisals.

"Banks that have failed to take appropriate charge-offs or provisions for probable losses will be directed to do so and to take concrete action to strengthen their credit administration," Dugan said.

While many of the biggest U.S. banks have already revalued their mortgage-related CDO exposures, there may be additional write-downs if the housing market continues to weaken, he said.

Another "significant concern" is that some banks may be forced to repurchase securities from investors because of the problems among bond insurers, Dugan said. "If this happens in large volumes, banks would incur price and liquidity risks and would face increased strain on their capital ratios."

Dugan also said that despite the pressures on U.S. banks, their overall condition remains solid.

"The system is being tested," Dugan said. "Despite these strains, the banking system remains fundamentally sound."

The Office of the Comptroller of the Currency regulates about 1,700 of the nation's biggest banks, such as Citigroup .

http://moneynews.newsmax.com/money/arch ... 110459.cfm