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Deals Need Scrutiny

November 10, 1985

The entire business and financial community should take notice of the clear but sobering message delivered in the recent article, "Bankers Enter New World of High Risk" (Oct. 27).

The managements of major U.S. banks are no doubt under mounting pressure to produce acceptable profits for their shareholders, while at the same time confronting intense competition from outside the banking industry and much stiffer regulatory requirements with respect to capital adequacy and asset quality. It is, therefore, not surprising to witness the explosive growth of off-balance-sheet transactions by the largest U.S. banks.

In aggregate, these forward commitments of credit by the 15 largest U.S. banks amount to about 2.5 times the total loans on their books, or almost 1.7 times their total assets.

Before the recent buildup of off-balance-sheet transactions, a number of the largest U.S. banks were known to be struggling with serious asset quality and capital adequacy problems.

The question therefore must be asked, "What additional risks and potential losses are contained in the recent sizable accumulation of off-balance-sheet transactions?" In the interest of maintaining a strong, healthy commercial banking system, I urge the various federal and state regulatory agencies to strongly scrutinize off-balance-sheet transactions of every kind when evaluating the capital and reserves of all banks.

Furthermore, I recommend that enlightened bank customers and investors make appropriate inquiries of their banks and the regulatory agencies to become aware of the extent and quality of their banks' commitments of credit through off-balance-sheet transactions.

HARRY M. GAGE

President and Chief Executive

Pasadena First National Bank

Pasadena

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