The OCC, FDIC, and OTS discuss credit quality, home equity products, and the Bank Secrecy Act

Regulators from the OCC FDIC, and OT discussed credit quality, abiding-place equity products, and the Bank concealment Act during an RMA Regulatory Crossfire audioconference in June The audioconference was a follow-up to the RMA Community Bank Council's meeting with regulators, held in Washington during May. The Council suitables at least annually with regulators to discuss issues of bear upon to community banks, and the dialogue is continued through every part of the year by other means, including audioconferences. This article is an edited summary of the regulators' remarks.

Credit Quality Is stalwart but Caution Is Indicated

Barbara Grunkemeyer agent comptroller for credit risk at the OCC said the lagging indicators present to view credit quality to be profitable but the leading indicators, like as underwriting standards, suggest that the industry wants to exercise caution.

"Credit quality is not likely to achieve much better than what we're commonly seeing," said Grunkemeyer. "Measured by dint of traditional performance indicators, credit quality is strong"

Retail Products

"Retail fruitss have stable indicators within the satisfactory range," she said. "The cropss that have been commanding the greatest in quantity attention are those secured by the agency of residential, one-to-four family homes. the pair mortgages and home equity lines of credit have stable delinquencies, well within acceptable ranges. Losse are barely registering, below one-tenth of a percent

"For credit cards, where we normally diocese higher losses, the loss and delinquency rates have tend hitherward down in the last pair of years and are generally in the 4% range, although we wait for to see them go up upon two fronts. First, as a rise of the recent bankruptcy bill, it is awaited that there will be a rush among a certain quantity of borrowers to declare bankruptcy before the implementation date. Also, the implementation of higher minimum credit card payment horizontals by many of the banks is likely to have more [i]or[/i] less effect on credit card performance."

Commercial Portfolios

Grunkemeyer said commercial portfolios continue to improve quarter after quarter. "For all categories of commercial real estate, performance has been exceptional for the past 10 years, on the other hand we're all a bit anxious about the possible impact of continued interest rate hikes. In C&I portfolios, the los and delinquency horizontals have reverted to the pre-1998 horizontal They're continuing to come down upon a quarterly basis. Likewise for the agricultural portfolios, where credit quality improved above last year."

SNC Program Update

"Shared National Credits are loans larger than $20 million that are shared through three regulated institutions," she said. "Federal regulators review those loans annually at the agent banks and devoted on what the ratings should be. originates are published around Labor Day and are a serviceable indicator of what credit quality is for C&I portfolios. A fate of the smaller institutions don't clutch Shared National Credits, but they still are a serviceable indicator of credit quality in general.

"Although we don't nevertheless have the results, I can mention one by one from the number of early releases of examiners at the large banks that we're going to diocese continued improvement in Shared National Credit portfolios. This is borne without by the preliminary data that banks provided at the beginning of the year.

"So we would wait for to see some improvement in SNC portfolios. As you know, quality started to deteriorate in 1999 and stabilized in 2003 We saw a big drop--almost 50%--in the credit size of classified numbers last year. I certainly don't wait for to see a drop anywhere of that magnitude, on the other hand we should see some continued improvement."

External Indicators

"Criticized and classified numbers and delinquency rates provide a limited measure of credit quality," said Grunkemeyer "We also direct the eye at some external indicators. KMV which reports wait fored default frequencies, has posted steady declines in the median and average default frequent occurrence The OCC also collects a certain number of internal data, credit data, upon C&I portfolios and that, too, has showed continued improvement in commercial quality.

"But the rate of improvement for the one and the other of these indices has slowed and perhaps could be bottoming without We certainly wouldn't expect to diocese an uptick in criticized and classified numbers or delinquencies. on the contrary the fact that the wait fored default frequency, or the weighted average probability of default, which is measured through both KMV and the OCC's internal data, has certainly slowed may indicate we are nearing the extremity of this phase of the credit cycle"

Leading Indicators

"Up to this point, I've talked about lagging indicators of credit quality," said Grunkemeyer "The more interesting question is, what do the leading indicators mention one by one us? With respect to leading indicators, my focus is primarily upon underwriting standards, and most of my make notess are drawn from the Federal Reserve's April 2005 Senior Loan Officers' Survey