Banks’ Reserve Cuts Drawing Close Scrutiny, OCC’s Curry Says

U.S. regulators may take action against banks that boost risk by excessively reducing loan-loss reserves, Comptroller of the Currency Thomas Curry said in a Dallas speech.

“Too many institutions are continuing to reduce provisions solely to boost earnings,” Curry said in remarks prepared for a Risk Management Association conference today. “If provisioning continues at current levels and charge-offs remain constant, the allowance as a share of non-current loans could return to historical lows in just a few years.”

JPMorgan Chase & Co. (JPM), the biggest U.S. bank by assets, and rivals Wells Fargo & Co. (WFC) and Citigroup Inc. (C) all reported third- quarter earnings that beat analysts’ estimates. Jamie Dimon, JPMorgan’s chairman and chief executive officer said on Oct. 12 that housing-market improvements enabled his New York-based bank to reduce related reserves by $900 million.

In the recovery since the 2008 financial crisis, the improvements in commercial real estate still won’t soon reach previous peaks, and as many as half of the loans will need to be rolled over by 2014, Curry said. With quarterly reserves failing to meet the level of charge-offs, Curry said the OCC is “ready to take action” if needed.

On-site Examinations

OCC staff members conduct on-site examinations of national banks and federal savings associations and provide sustained supervision of the institutions’ operations, according to the agency’s website. Actions against lenders deemed to be engaging in unsound practices can include cease-and-desist orders, fines and removal of officers and directors, according to the website.

“To be clear, I am not saying that we see an immediate problem at national banks and federal savings associations that demands urgent corrective action,” Curry said in the speech. “But I am saying that we are watching reserves very closely, and we expect national banks and federal savings associations to maintain them at appropriate levels.”

Regulators have been meeting with accounting-oversight organizations and industry groups to ensure wide understanding of what it takes to properly set aside reserves, Curry said.

Bryan Hubbard, an OCC spokesman, declined to comment on what actions the agency would consider.

As Curry spoke in Texas, his agency issued an emergency authorization allowing national banks and federal savings association offices in the path of Hurricane Sandy to close if necessary. As with other federal government offices in Washington today, the OCC and other banking regulators’ offices were closed to the public and non-emergency workers.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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