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QJ 17/2 Front Office of the Comptroller of the Currency September 1998 Comptroller (Acting) . Julie L. Williams Executive Committee Chief of Staff . vacant Chief Counsel (Acting) . Raymond Natter Senior Deputy Comptroller for Administration . Edward J. Hanley Senior Deputy Comptroller for Bank Supervision Operations . Leann G. Britton Senior Deputy Comptroller for Bank Supervision Policy . Emory Wayne Rushton Senior Deputy Comptroller for Economic and Policy Analysis . James D. Kamihachi Senior Deputy Comptroller for International Affairs . Susan F. Krause Senior Deputy Comptroller for Public Affairs . vacant Ombudsman . Samuel P. Golden Background The Comptroller The Office of the Comptroller of the Currency (OCC) was Julie L. Williams became acting Comptroller of the established in 1863 as a bureau of the Department of the Currency on April 6, 1998, succeeding Eugene A. Ludwig Treasury. The OCC is headed by the Comptroller, who is whose term of office had ended. She had been chief appointed by the President, with the advice and consent counsel since 1994 with responsibilities for all of the of the Senate, for a five-year term. agency’s legal activities. As the Comptroller’s top legal advisor, Ms. Williams served as a member of the Execu- The OCC regulates national banks by its power to: tive Committee, providing advice and guidance on major issues and actions. Ms. Williams joined the OCC in 1993 • Examine the banks; as deputy chief counsel, with responsibility for special • Approve or deny applications for new charters, legislative and regulatory projects. branches, capital, or other changes in corporate or banking structure; Before joining the OCC in 1993, Ms. Williams served in a variety of positions at the Office of Thrift Supervision and • Take supervisory actions against banks that do not its predecessor agency, the Federal Home Loan Bank conform to laws and regulations or that otherwise Board. From 1991 to 1993, she was senior deputy chief engage in unsound banking practices, including counsel, responsible for regulations and legislation, cor- removal of officers, negotiation of agreements to porate and securities law and general legal issues. She change existing banking practices, and issuance previously served as deputy chief counsel for securities of cease and desist orders; and and corporate analysis. In 1983 she joined the Bank • Issue rules and regulations concerning banking Board, after working as an attorney since 1975 with the practices and governing bank lending and invest- law firm of Fried, Frank, Harris, Shriver & Kampelman in ment practices and corporate structure. Washington, D.C. The OCC divides the United States into six geographical Ms. Williams is the author of Savings Institutions: Merg- districts, with each headed by a deputy comptroller. ers, Acquisitions and Conversions (Law Journal Semi- nars-Press, 1988) and has published numerous articles The OCC is funded through assessments on the assets on the regulation of depository institutions, financial of national banks, and federal branches and agencies. services, securities and corporate law matters. She was Under the International Banking Act of 1978, the OCC awarded a B.A. from Goddard College, Plainfield, Ver- regulates federal branches and agencies of foreign mont, in 1971, and a J.D. in 1975 from Antioch School of banks in the United States. Law, Washington, D.C., where she was first in her class. The Quarterly Journal is the journal of record for the most significant actions and policies of the Office of the Comptroller of the Currency. It is published four times a year in March, June, September, and December. The Quarterly Journal includes policy statements, decisions on banking structure, selected speeches and congressional testimony, material released in the interpretive letters series, statistical data, and other information of interest to the administration of national banks. Suggestions, comments, or questions on content may be sent to Rebecca W. Miller, Senior Writer-Editor, Communications Division, Comptroller of the Currency, Washington, DC 20219–0001. Subscriptions are available for $100 a year by writing to Publications—QJ, Comptroller of the Currency, P.O. Box 70004, Chicago, IL 60673–0004. You may now view the Quarterly Journal on the World Wide Web at http://www.occ.treas.gov. Quarterly Journal Office of the Comptroller of the Currency Julie L. Williams Acting Comptroller of the Currency The Administrator of National Banks Contents Page Condition and Performance of Commercial Banks . 1 Special Studies on Technology and Banking— “Technological Innovation in Banking and Payments: Industry Trends and Implications for Banks” Karen Furst, William W. Lang, and Daniel E. Nolle . 23 Recent Corporate Decisions . 33 Special Supervision/Fraud and Enforcement Activities . 35 Appeals Process . 39 Speeches and Congressional Testimony . 51 Interpretations—April 1 to June 30, 1998 . 109 Mergers—April 1 to June 30, 1998 . 129 Tables on the Corporate Structure of the National Banking System . 137 Tables on the Financial Performance of National Banks . 149 Index . 165 Quarterly Journal, Vol. 17, No. 3, Septermber 1998 iii Condition and Performance of Commercial Banks Commercial banks reported their sixth consecutive quar- year-ago and previous-quarter decreases in ROA and ter of record earnings in the second quarter of 1998. This ROE, to 1.29 percent and 14.80 percent, respectively (see unprecedented run of record earnings, however, has Figure 2). National banks out-performed state-chartered likely drawn to an end. First, several large banks have banks on an ROA and ROE basis, in the second quarter, already announced large write-offs for trading losses in but the difference in performance narrowed considerably. the third quarter because of deepening of the Asian and National banks earned a higher ROE than state-chartered Russian crises. Second, although most economists are banks in all but one quarter since 1993. not forecasting a national recession in the coming year, most forecasts now call for slower growth than previously Figure 2—Quarterly return on equity, 1993–1998 expected, with a higher risk of a recession. Given the Percent loosening of commercial credit standards over the last 20 four years, a slowdown in U.S. economic growth would National banks 18 likely lead to an increase in problem loans and lower bank earnings. The banking industry is facing this period 16 of possibly slower economic growth and economic un- certainty from a position of generally strong financial 14 health, though there was some moderation in credit quality and earnings growth over the last year. State banks 12 Earnings Trends 10 123412 341234123412 341234 Commercial banks earned a record $16.1 billion in the 1993 1994 1995 1996 1997 1998 second quarter of 1998 (see Figure 1). Industry earnings increased 10 percent from the second quarter of 1997 Source: Integrated Banking Information System and were 1 percent higher than in the first quarter of The ROE for the largest and smallest commercial banks 1998. The annualized return on average assets (ROA) for declined from the second quarter of 1997 (see Figure 3). all commercial banks was 1.25 percent, virtually un- For banks with assets over $10 billion, ROE declined 48 changed from both the second quarter a year ago and basis points to 15.25 percent, and banks with assets the first quarter of 1998. The industry’s annualized return under $100 million saw a 50 basis point decline to 11.27 on average equity (ROE) was 14.72 percent, unchanged percent. However, ROE increased compared with the from the second quarter a year ago, but down 30 basis first quarter for both these size groups. points from the first quarter. Figure 3—Quarterly return on equity by Figure 1—Quarterly net income, 1993–1998 size of bank, 1997 and 1998 $Billions (commercial banks) Percent 18 20 97Q2 98Q1 98Q2 15 Commercial banks 15 12 9 National banks 10 6 5 3 0 0 123412341234123412341234 Under $100 million $100 million – $1 $1 billion – $10 Over $10 billion 1993 1994 1995 1996 1997 1998 billion billion Source: Integrated Banking Information System Source: Integrated Banking Information System National banks earnings increased 9 percent from the There were large differences in the profitability by region second quarter of 1997 to $9.6 billion, but declined 4 for banks with assets under $100 million (see Figure 4). percent from the first quarter. National banks experienced Small bank profitability was considerably lagging in the Quarterly Journal, Vol. 17, No. 3, September 1998 1 Figure 4—Quarterly return on equity by region, Trading revenue was the fastest growing component of for second quarter 1997 and 1998 noninterest income, increasing 27 percent over the last (commercial banks with assets under $100 million) Percent year. However, trading revenue accounted for only 8 15 97Q2 98Q2 percent of noninterest income for the industry as a whole, with banks over $10 billion in assets accounting for 97 percent of total trading revenue. The share of total 10 noninterest income from fiduciary activities held steady at 15 percent, while the contribution from service charges on deposits declined to 16 percent from 18 percent a 5 year ago. Net interest income increased modestly even though 0 earning assets grew by 8 percent over the last year, Northeast Southeast Central Midwest Southwest West consistent with declining net interest margins. Net inter- Source: Integrated Banking Information System est income to assets in the second quarter declined by 16 basis points over the last year to 3.53 percent. Northeast and Southeast, the only regions where ROE was under 10 percent in the second quarter of 1998. Interest rate movements and changes in banks’ balance Small banks in the West earned the highest average sheet composition have both contributed to this decline ROE, and the West was the only region where small in average net interest margins. First, as shown in Figure banks showed an increase in ROE from a year ago.
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