Office of the Comptroller of the Currency March 2002 Comptroller ...................................................................................... John D. Hawke Jr. Executive Committee First Senior Deputy Comptroller and Chief Counsel .......................................................Julie L. Williams Chief of Staff ........................................................................................ Mark A. Nishan Senior Deputy Comptroller and Chief National Bank Examiner ...................................... Emory Wayne Rushton Senior Deputy Comptroller for Large Bank Supervision .................................................Douglas W. Roeder Senior Deputy Comptroller for Mid-Size/Community Bank Supervision ...................................... Leann G. Britton Chief Information Officer ........................................................................Jackquelyn E. Fletcher Senior Deputy Comptroller for International and Economic Affairs .......................................Jonathan L. Fiechter Senior Deputy Comptroller for Management and Chief Financial Officer ...................................Edward J. Hanley Ombudsman ......................................................................................Samuel P. Golden Senior Deputy Comptroller for Public Affairs (Acting) ...................................................... Mark A. Nishan Background recess. He was confirmed subsequently by the U.S. Senate for a five-year term starting on October 13, 1999. Prior to his The Office of the Comptroller of the Currency (OCC) was es­ appointment Mr. Hawke served for 31⁄2 years as Under Secre­ tablished in 1863 as a bureau of the Department of the Trea­ tary of the Treasury for Domestic Finance. He oversaw devel­ sury. The OCC is headed by the Comptroller, who is appointed opment of policy and legislation on financial institutions, debt by the President, with the advice and consent of the Senate, management, and capital markets; served as chairman of the for a five-year term. Advanced Counterfeit Deterrence Steering Committee; and was a member of the board of the Securities Investor Protec­ The OCC regulates national banks by its power to: tion Corporation. Before joining Treasury, he was a senior part­ • Examine the banks; ner at the Washington, D.C., law firm of Arnold & Porter, which he joined as an associate in 1962. In 1975 he left to serve as • Approve or deny applications for new charters, general counsel to the Board of Governors of the Federal Re- branches, capital, or other changes in corporate or serve System, returning in 1978. At Arnold & Porter he headed banking structure; the financial institutions practice. From 1987 to 1995 he was chairman of the firm. • Take supervisory actions against banks that do not conform to laws and regulations or that otherwise Mr. Hawke has written extensively on the regulation of financial engage in unsound banking practices, including re­ institutions, including Commentaries on Banking Regulation, moval of officers, negotiation of agreements to published in 1985. From 1970 to 1987 he taught courses on change existing banking practices, and issuance of federal regulation of banking at Georgetown University Law cease and desist orders; and Center. He has also taught courses on bank acquisitions and serves as chairman of the Board of Advisors of the Morin • Issue rules and regulations concerning banking prac­ Center for Banking Law Studies. In 1987 Mr. Hawke served on tices and governing bank lending and investment a committee of inquiry appointed by the Chicago Mercantile practices and corporate structure. Exchange to study the role of futures markets in the October 1987 stock market crash. He was a founding member of the The OCC divides the United States into six geographical dis­ Shadow Financial Regulatory Committee, and served on it un­ tricts, with each headed by a deputy comptroller. til joining Treasury. The OCC is funded through assessments on the assets of Mr. Hawke was graduated from Yale University in 1954 with national banks, and federal branches and agencies. Under the a B.A. in English. From 1955 to 1957 he served on active International Banking Act of 1978, the OCC regulates federal duty with the U.S. Air Force. After graduating in 1960 from branches and agencies of foreign banks in the United States. Columbia University School of Law, where he was editor-in- chief of the Columbia Law Review, Mr. Hawke clerked for The Comptroller Judge E. Barrett Prettyman on the U.S. Court of Appeals for Comptroller John D. Hawke Jr. has held office as the 28th the District of Columbia Circuit. From 1961 to 1962 he was Comptroller of the Currency since December 8, 1998, after counsel to the Select Subcommittee on Education, U.S. House being appointed by President Clinton during a congressional of Representatives. 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. 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. Send suggestions or questions to Rebecca Miller, Senior Writer-Editor, Communications Division, Comptroller of the Currency, Washington, DC 20219. Subscriptions are available for $100 a year by writing to Publications—QJ, Comptroller of the Currency, P.O. Box 73150, Chicago, IL 60673–7150. The Quarterly Journal is on the Web at http://www.occ.treas.gov/qj/qj.htm. Quarterly Journal Office of the Comptroller of the Currency John D. Hawke Jr. Comptroller of the Currency The Administrator of National Banks Volume 21, Number 1 March 2002 Contents Page Condition and Performance of Commercial Banks............................................... 1 Comptroller’s Report of Operations—2001..................................................... 19 Recent Corporate Decisions................................................................. 77 Special Supervision/Fraud and Enforcement Activities .......................................... 79 Appeals Process .......................................................................... 85 Speeches and Congressional Testimony ...................................................... 89 Interpretations—October 1 to December 31, 2001 ............................................ 105 Mergers—October 1 to December 31, 2001.................................................. 117 Tables on the Corporate Structure of the National Banking System .............................. 127 Tables on the Financial Performance of National Banks ........................................ 153 CFO’s Annual Report—FY 2001 ............................................................. 169 Index.................................................................................... 197 Quarterly Journal, Vol. 21, No. 1, March 2002 iii Condition and Performance of Commercial Banks Summary of Condition and Performance market-sensitive income has fallen sharply as a result of the slower pace of corporate mergers and acquisitions, Banks enjoyed a particularly good fourth quarter in 2001, and the decline in trading volume in equity markets. On as earnings rose both for national banks and for all com­ the international side, Germany and Japan remain mired mercial banks. A continuing decline in interest rates ben­ in recession, and with them many of our other major trad­ efited banks in two ways: by allowing a rise in net interest ing partners. Thus international income, which boosted margins, and by allowing banks to realize gains from the earnings for many large banks during the last recession, sale of securities. Most of this benefit went to large banks. has not provided the same kick to earnings this time around. Small banks will face pressure on earnings if they have exposure to weak industries, or if they are in coun­ On the negative side, provisioning expenses continued to tries with weak labor markets. rise, as a softer economy led to lower asset quality across the board, and most prominently in commercial and in­ dustrial (C&I) portfolios. This weakness is likely to persist for some sectors and regions, whatever the path of the Figure 2—Asset quality deteriorated across the recovery. The result will be continuing asset quality ero­ board sion for banks with exposure there. Non-specialty national banks Percent of loans noncurrent 3 9912 0012 0112 Figure 1—ROE higher for national banks 2.5 Commercial and national bank ROE Percent 2 18 16 1.5 Commercial 13.90 14 1 13.10 12 10 0.5 National 8 0 6 Total loans RE C & I Credit card Installment 4 2 0 -2 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 Key Trends In the fourth quarter, return on equity for national banks Banks will be hard pressed to repeat their earnings per­ rose sharply to 14.9 percent, up 130 basis points (bps) formance in the near future. If the economy does not re- year-over-year and 260 bps quarter-over-quarter. This cover quickly, loan volume and noninterest income will puts ROE close to the 16-plus-percent range recorded in lag, and credit quality will decline. But earnings are not the mid and late 1990s. The story was different for the likely to rise even if the economy does recover quickly, as broader population of all commercial banks, where ROE this would likely push up interest rates, reducing net inter­ rose 40 bps on the quarter but fell