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From Banking and Finance Law Daily, November 30, 2016

Comptroller of the Currency discusses the importance of effective supervision

By John M. Pachkowski, J.D.

In remarks before The Clearing House Annual Conference in New York City, Comptroller of the Currency Thomas J. Curry noted that he was "often disappointed how quickly some forget the lessons of more recent events, particularly what brought the financial system to the cliff in 2008 and what has put our banks and our economy on much firmer ground since." The bulk of his remarks touched on the value of strong capital, the need for ample liquidity, and the importance of effective supervision.

Capital. Discussing capital, Curry noted that since the beginning of 2009, there has been a $700 billion increase in common equity capital and that those levels would allow the 33 largest bank holding companies to be well capitalized and continuing lending even under the most severe scenario used by the banking agencies’ stress tests. However, he cautioned that to achieve this, capital levels must remain strong. Curry added, "The benefits of a robust banking system built on strong capital should not be forgotten in any debates about regulatory reform and striking the right balance in capital standards going forward." He also warned of efforts to water down leverage ratios that serve as an additional line of defense, or backstop, to the risk-based capital measures, noting "Weakening the ratio through special exclusions only undermines our original intent and weakens the protection against excessive leverage."

Liquidity. Observing that the "lack of liquidity contributed as much to solvency issues in 2008 as weak capital did," Curry discussed the efforts taken by the three banking agencies to ensure that banks have ample liquidity. He noted that the Liquidity Coverage Ratio and the proposed Net Stable Funding Ratio are two ratios that complement each other to push covered banks to hold ready resources to meet short-term cash outflows and to shift to more stable, longer-term funding.

Supervision. On the subject of supervision, Curry noted that "holistic supervision" based on the CAMELS rating system is so important. He added that while a periodic reassessment of banking laws and regulations is appropriate, "we must never settle for ‘light-touch’ supervision."

Community banks. Finally, Curry stated that "America’s community banks are stronger today" with return on equity among community banks having nearly recovered to pre-crisis levels, and steady loan growth. He stressed, however, "To remain strong and healthy, community banks, and their examiners, need to focus on strategic risk, rising credit risk from stretching for yield while relaxing underwriting standards, expansion of new technologies, and compliance issues."

Companies: The Clearing House

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