U.S. regulator warns on banks' "habit" of reducing reserves
WASHINGTON, Sept 16 (Reuters) - Banks have got into the habit of reducing reserves held in case of losses in an effort to boost earnings, a top U.S. bank regulator said on Monday.
Comptroller of the Currency Thomas Curry said relaxed underwriting standards and other signs of rising credit risk have not deterred banks from dipping into loss reserves, a problem regulators have pointed out periodically over the last year.
"Of course, it is to be expected that banks will release reserves accumulated during difficult times as underwriting standards, loan performance, and the economic climate improve," Curry said in a speech before an American Institute of Certified Public Accountants conference.
"For some banks, the ease with which the allowance could be repurposed as earnings has proved habit-forming," he said.
Curry said he supports new rules from accounting regulators calling for lenders to set aside funds in anticipation of losses earlier, rather than waiting until losses are incurred.
Loan-loss reserves are set aside in case borrowers default on mortgages or other loans. Banks recently have dipped into that money to boost their quarterly earnings, according to the Federal Deposit Insurance Corp (FDIC), which reports on the industry's performance each quarter.
Curry said regulators brought the issue to the industry's attention in the fall of 2012, and their efforts appeared to make a difference when banks slowed the pace at which they cut reserves.
The practice returned, Curry said, despite looser underwriting standards. In the second quarter of 2013, banks cut the amount they set aside in case of losses by $5.6 billion, or 40 percent, the FDIC said recently.
Big banks including JPMorgan Chase, Wells Fargo and Bank of America have said recently that more borrowers are paying their loans on time. In light of these statements, analysts expect loss reserve reductions to continue at many banks.
Curry said the reductions do not constitute a crisis but that regulators expect banks to make wise risk management decisions.