As U.S. banks reduce the reserves they set aside for bad loans, examiners are digging through their books to make sure they’re not going too far, said Comptroller of the Currency Thomas Curry.
Curry and other banking regulators have warned the industry not to eat away at loan-loss reserves to show higher profits. Federal Deposit Insurance Corp. data released yesterday showed banks last year set aside 25 percent less than they did the previous year while recording the second highest annual incomes ever. Examiners are reviewing reserves on a “case-by-case” basis, Curry said in an interview.
“What we tried to do was to raise it as a general matter of concern, to raise awareness within the industry,” said Curry, who started cautioning the banks about their reserves in September. “It’s really our examinations on the ground that will get into the weeds with the individual institutions.”
In October, Curry said his agency was “ready to take action” against banks that boost risk by excessively reducing loan-loss reserves. Actions against lenders found by the OCC to be engaging in unsound practices can include cease-and-desist orders, fines and removal of officers and directors.
The $15.1 billion set aside last quarter was a fraction of the $69.4 billion added to reserves four years ago, at the height of the credit crisis, according to FDIC data. The loan- loss reserves set aside in recent quarters have been less than the loan losses banks have recorded, though the losses have also steadily declined.
JPMorgan Chase & Co. (JPM:US), the biggest bank by assets, said last month its fourth-quarter profit rose 53 percent as mortgage revenue more than doubled and the lender set aside less for future losses. The New York-based bank reported setting aside $656 million against future mortgage loan losses.
FDIC Chairman Martin Gruenberg told reporters yesterday that banks will soon have to wind down the squeezing of reserves to boost profits.
“Industry earnings are going to depend on increased credit by the industry,” he said. “That’s really the key factor we’re looking at going forward.”
Curry also said he Federal Reserve Governor Daniel Tarullo’s prediction that new bank capital rules will be finished by the end of June.
“I don’t want to jinx it but I think we’re doing pretty well,” Curry said of the so-called Basel III rules, an international accord to strengthen bank capital. “Conceptually I think there’s a lot of agreement. Now it’s a matter of getting a final rule that makes sense.”
He said his agency and the four others required by the 2010 Dodd-Frank Act to ban proprietary trading by banks under the so- called Volcker rule are still “looking at getting the actual rule text and rule provisions done.” The other agencies are the OCC, Fed, Securities and Exchange Commission, and Commodity Futures Trading Commission.
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