On Classified Loans

Wriston, Walter B.


On Classified Loans by Walter B. Wriston for The New York Times

On Classified Loans by Walter B. Wriston for The New York Times


Like all other industries, banking is a business. It moves money from where it is available to where it is needed and provides whatever services are required to get it there. The banking business also has a larger responsibility and that is to assure the functioning of our economy when other markets falter.

In the discharge of this national obligation, banks can and do take calculated risks. They provide credit to individuals temporarily fallen upon hard times and to businesses pinched between inflation and recession.

Like all human institutions, the banking system is always subject to improvement. Throughout the first recession in 40 years, however, the system has performed its function and emerged strong and viable.

The current journalistic voyeurism regarding "classified loans" deserves comment. This attack does very little to improve the general state of our country and, more important, does nothing to encourage the banking system to continue to supply the credit needed by business and governments to keep people at work.

The current buzzword, "classified loan," has been floated about as if it were some kind of Typhoid Mary. Classifying loans as to their relative health has been part of the management and regulatory process of the banking system for many years. It is nothing more or less than a diagnostic tool used to help determine future action. An individual gets a cold and takes an aspirin. The second step can be the prescription of antibiotics. The third step is hospitalization. And the final remedy may be intensive care or radical surgery where the outcome could go either way. Just as there are all gradations of illness there are also all shades of management and regulatory opinion about individual loans.

What front-page sensationalism forgets is that one man's classified loan is another man's hope for the future.

The fact is that Citibank's experience since 1812, as well as the experience of banks generally, prove conclusively that the overwhelming percentage of those hopes are realized as long as companies and individuals are permitted to work out their problems consistent with the American tradition of the right to privacy.

Over the years there have been dozens of industries supplying millions of jobs that have been nursed back to health by the banking system. It was not very long ago that the pundits of the press were administering the last rites to the utility industry. The problems of that industry were compounded by the petroleum crisis that forced up costs, the slowness of regulators to permit the pass-through of these costs to the consumer, and the skepticism of the capital markets in receiving new utility offerings.

In this situation, the banks stepped up to their responsibilities. Our management process at Citibank revealed that the percent of loans classified to the utility business soared as did the amounts outstanding, but it also revealed we have not lost one dollar from meeting our obligations to this important sector of our economy. The lights kept burning across this land and people kept their jobs.

After the management and regulating process has delineated the aspirin loans and the temporary hospitalization loans, we get down to the classification of loans that are and should be treated as uncollectable and eliminated from the bank's balance sheet by a charge against earnings.

There are no secrets here. These loan write-offs are reported in great detail by all banks. As a matter of prudence, these write-offs are taken immediately, but Citibank's experience is that about $40 is eventually recovered for every $100 written off.

In short, the process of loan classification is a specialized diagnostic tool used by the banks and regulators alike. The raw data of loan classification shed no more light than a summary of Merck's Manual of Diagnosis and Therapy.

One of the side effects of this sensationalism is to promote innuendos that somewhere there is a vast body of secret information that is withheld from the Congress and the public, the revelation of which would serve some public purpose. Yet there is probably more information available about banking than anybody knows what to do with. The banking system reports in one way or another to the Federal Reserve Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the state bank examiners, the Securities and Exchange Commission, the Federal Trade Commission, the Federal Communications Commission, the Equal Employment Opportunity Commission and to numerous other state and Federal agencies.

The obligation of the banking system is to continue to supply the credit and service that are needed in good times and in bad to produce the jobs our country needs. If a bank had no classified loans, it would not be doing its job, because the circle of credit would contract until it included only the Triple A names of the world. The medium and small businesses or any industry, large or small, temporarily beset would grind to a halt. New businesses would never get off the ground. People who are denied credit because their loan might be classified and that classification might appear on the front page would be understandably irate and their unemployed workers even more so.

Representative Wright Patman, interviewed in the spring 1971 issue of , said: "I criticized the banks one year when they had no losses at all. I said they were not doing their duty. If they are carrying out the private enterprise system, they'd have some losses. They can't be perfect on everything." Mr. Patman has said it all. Banking, like any industry, takes risks in performing its function. As long as those risks are kept within its risk-taking capability, banking is validating its charter in helping make the economy operate. By every measure the system can be proud of its record.

  • This document was created from the article, "On Classified Loans" by Walter B. Wriston for the 30 January 1976 edition of "The New York Times." The original article is located in MS134.003.026.00015.
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