U.S. regulator sees big reform ahead, cautions bankers

U.S. bankers need to prepare for sweeping financial regulation changes that are gaining momentum in Congress, Comptroller of the Currency John Dugan said on Monday.

"I think the momentum for fundamental change is building," Dugan said during the American Bankers Association annual convention.

The House Financial Services Committee in recent weeks has picked up its pace on moving financial reform legislation forward. The committee has approved language on executive pay, on regulating over-the-counter derivatives and on creating a new consumer agency to police financial products.

While the Senate's time has been consumed by healthcare reform and has not made significant progress on financial regulation, Dugan said bankers should not be lulled into thinking a comprehensive reform package will not pass eventually.

"I would not be fooled by that," he said.

The Obama administration is also planning to send new language to Congress that would give the government the power to dismantle large financial firms if they become insolvent.

Dugan said there will be "significant changes" to the administration's original proposal.

An administration official said on Monday that the strategy would make it easier for the government to oust managers, wipe out shareholders and restructure the firm's outstanding loans.

COMMERCIAL LOANS LOOMING

Dugan said he has been heartened by some improvements in the delinquency rates in the retail credit sector, and said there are early signs that portion of the banking industry could turn better in the first half of next year.

But he said commercial real estate loan portfolios will continue to deteriorate, even as retail credit improves.

"We still could be in for a very rough ride," he said.

Regulators plan to issue guidance this week that will give banks concrete examples on how to modify commercial real estate mortgages, Dugan said.

As of June, commercial real estate loans totaled more than $1 trillion, or 14.2 percent of all loans and leases in the banking industry.

Prices for existing commercial properties have fallen 35 to 40 percent since peaking in 2007 and more declines are anticipated. Rising job losses and high vacancy rates also are weakening demand for commercial property.

Unlike the dramatic drop in prices for securitized home mortgage loans, Dugan said the commercial real estate loans have taken longer to unravel.

He said the extent of the commercial real estate problem is an outstanding question.

"We don't know the answer yet and much will depend on the strength and speed of the recovery," he said.

(Reporting by Karey Wutkowski; Editing by Richard Chang)

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