A major unanswered question in First National Bank of Chicago's writeoff of $279 million in loans in the third quarter after a regulatory examination is why the bank's management did not detect the problem sooner.
The loans were written off only after an August examination by auditors from the Comptroller of the Currency. The bank, with assets of $38 billion, shocked the financial community when it announced the writeoff Wednesday and said it would result in a third-quarter loss of $70 million to $74 million.
Most of the loans already were on the bank's so-called problem list -- which reflects loans the borrower is having trouble repaying on schedule. Although the bad loans -- those the bank decides will never be repaid -- were not concentrated in a particular industry, most were in industries that have been having difficulties: energy, shipping, and agriculture.
First Chicago Chairman Barry Sullivan, at a Chicago press conference Wednesday and at a securities analysts meeting Thursday in New York, said that the decision to take the massive writeoff was reached jointly by the examiners and the bank. Sources who know the First Chicago situation well said the regulators put pressure on the bank to write off the loans -- including the bank's share of syndicated loans to Apex Oil Co., Great Western Sugar Co. and the Shaboski Group of Saudi Arabia.
At Thursday's meeting Sullivan said other banks that participated in a number of the loans that hit First Chicagolikely would face the prospect of writing down the value of those loans. He noted that it is standard procedure for regulators to write letters to other banks involved when they force one participating bank to write off a loan.
But banking sources said First Chicago was far slower than other banks in recognizing the declining value of these loans. The Comptroller of the Currency has changed its examination procedures in recent years and now examines multinational banks several times a year rather than annually -- a change instituted in large part because of the de facto failure of First Chicago's rival, Continental Illinois National Bank.
These sources said examiners have been to nearly all major U.S. banks in recent months and did not find the problems found at First Chicago.
Sullivan said the bank's loan review procedures had been quick to identify the loans as problems but had not been as efficient in dealing with the loans after they were so classified.
Most problem loans do not become bad loans. But a good loan review procedure should recognize when a loan slides from being a problem to being a loss. First Chicago officials said there was a sharp, unexpected deterioration in the loans in the three months since they were last rigorously examined by the bank's internal auditors. But sources said other banks were not so surprised by the decline in the loan quality.
Analysts said that the announcement is a black eye for Sullivan, but that First Chicago will retain its credibility if Sullivan proves right in his prediction that it is a one-time event.