NR 97-61
June 24, 1997

NOTE TO EDITORS:

This is the first in a periodic series of informal letters from
the Office of the Comptroller of the Currency's (OCC) Senior
Deputy Comptroller for Bank Supervision Policy, Emory W. Rushton,
to national bank chief executive officers discussing a variety of
banking issues.  This letter notes that the OCC is currently
preparing guidance for banks on allowance for loan and lease
losses, asset securitization, and internal controls.

To follow up on any of these issues, please call the OCC press
office at (202) 874-5570.


                              # # #

The OCC charters, regulates and supervises approximately 2,800
national banks and 66 federal branches and agencies of foreign
banks in the U.S., accounting for more than half the nation's
banking assets.  Its mission is to ensure a safe, sound and
competitive national banking system that supports the citizens,
communities and economy of the United States. June 24, 1997


Dear National Bank CEO:
                                
Since it would be impossible to personally greet the chief
executive officers of all national banks at one time, I am
writing to introduce myself.  I also want to share with you some
additional information about banker guidance we have recently
adopted or expect to adopt shortly.

The Comptroller appointed me Senior Deputy Comptroller for Bank
Supervision Policy on May 5, 1997, after 32 years of service in
various positions with the OCC, mostly as a field examiner.  I
strongly believe one of our most important jobs as bank
supervisors is to anticipate change in the banking system in such
a way that we can assist bankers in preparing for the future.  I 
also believe in open and direct communication, and that timely,
informal channels are an effective supplement to more formal
policy missives, Federal Register notices, and the like. 
Therefore, this is the first in what I anticipate will be a
series of  informal messages in which I can share with you
issues, trends, or concerns that warrant our collective
attention.

  Banking Fundamentals

Today, the banking system is quite healthy, profitable and far
better capitalized than at any time in recent memory.  But we
have to be careful to avoid complacency and overconfidence, no
matter how good things seem to be at the moment.  This is why I
believe it is important for us to take the time now to evaluate
and make sure we are emphasizing the time-tested fundamentals of
sound banking.

In my 32 years of dealing with banks of all sizes, I have
observed two basic principles in banks that remain successful
throughout the business cycle -- managing risks well and not
letting core standards slip in good times.  The products, lines
of business, delivery channels, and organizational structures of
banking are evolving and changing, but sound banking remains
rooted in banks' ability to identify, measure, monitor, and
control risks and to maintain reserves and capital adequate to
cover those risks.  Further, I think we all recognize that good
times are the best times for banks to fix or shore up potential
weaknesses, rather than resting on current performance.

  Upcoming Initiatives

In this regard, I'd like to report to you on some initiatives we
are working on at the Comptroller of the Currency's Office. 
These initiatives build on actions we have already taken while at
the same time addressing current trends and concerns.  I am
hopeful they will help you in evaluating your risk management and
control systems.

Allowance for Loan and Lease Losses - As you well know,
maintaining an adequate allowance for loan and lease losses at
various stages of the business cycle is essential to safe and
sound banking.  In recent months, the OCC and some industry
analysts have become concerned that certain measures of allowance
coverage are beginning to decline at the same time certain credit
quality indicators appear to be deteriorating.  The OCC will soon
issue guidance to remind banks of the importance of sound
allowance methodologies and adequate allowance coverage.  That
guidance will discuss weaknesses examiners have seen in some
banks' methodologies and will outline steps banks can take to
strengthen their allowance processes.

Asset Securitization - Improved risk management tools and
information technology are enhancing banks' ability to securitize
and fund assets off their balance sheets.  Asset securitization
programs have become an important component of many banks'
funding and fee income strategies.  These activities, however,
also heighten the need to have sound credit underwriting,
liquidity management, and internal control processes.  Asset
securitization programs make a bank's core processes more
transparent to the markets and, as a result, any weakness can
have an immediate adverse consequence on bank funding, earnings,
and capital.

Later this summer, the OCC will issue comprehensive examination
guidelines for asset securitization.  Those guidelines will focus
on a national bank's role as credit intermediary and issuer of
asset-backed securities, and will address the associated
liquidity, transaction, and reputation risks.  The guidelines
will explain asset securitization structures and processes, the
key elements of risk management, and critical control points for
securitization activities.

Internal Controls - Because bank products and services are
becoming increasingly more complex and volume-based, we are
reemphasizing the need for banker diligence in seeing that
internal controls remain strong.  Effective and reliable control
systems are the linchpin of sound banking and permeate every line
of business or activity.  In recent years the consequences of
deficient controls at a number of major institutions have been
well-documented.  The OCC will soon provide additional guidance
in this critical area with the release of an updated
Comptroller's Handbook section on internal controls that will
provide an overview of internal control processes.  In addition,
future handbook sections will include procedures tailored to
testing and evaluating controls governing specific products or
activities.

  Building on Previous Actions

The guidance described above complements our recent policy
initiatives in other important areas.  Over the last year,
Comptroller Ludwig has sounded notes of caution about the effects
of competitive pressures on underwriting standards in some
business segments, including the syndicated loan market and, more
recently, certain retail credit products.  Consistent with his
message, in March, the OCC issued Advisory Letter 97-8, "Credit
Underwriting Standards and Portfolio Management," which outlined
key elements of an effective portfolio credit risk management
process.  Later this year, we will expand upon those fundamentals
as they relate to exception tracking, credit culture, and
management information systems.

More recently, we sent you a new section of the Comptroller's
Handbook that provides comprehensive guidance on managing
interest rate risk.  This Handbook section should assist you in
dealing with uncertainty about the volatility and direction of
interest rates and the growing complexity of interest-sensitive
bank products.  As they have for other risk areas, advances in
technology have provided banks with increasingly sophisticated
tools to manage this risk. The handbook section discusses ways to
use these tools to identify, measure, monitor, and control
interest rate risk.

  Conclusion

These are exciting times in banking that offer you the
possibility of new ways to develop and expand your products,
services, and markets to meet the needs of your customers and
communities.  I believe that by taking proper care today, banks
can continue to grow and thrive in the changing market place and
weather any challenges that lie ahead.  I encourage you to use
the various guidance materials the OCC is preparing to help you
reassess the adequacy of your bank's fundamentals and ensure that
you are well prepared for those opportunities.  As always, we
remain committed to ensuring a safe and sound banking system,
including developing our guidance for examiners and bankers in a
way that eliminates unnecessary supervisory burden.

I welcome your comments and thoughts on our current initiatives
and on issues that you believe may need additional attention.

Sincerely, 

/s/
Emory W. Rushton
Senior Deputy Comptroller for Bank Supervision Policy