WASHINGTON - The regulator for the largest U.S. banks said on Wednesday that 17 percent of national banks are now considered problem banks.

Comptroller of the Currency John Dugan said credit quality continues to deteriorate across almost all classes of banking assets, in nearly all sizes of banks.

He said national banks will need to set aside more capital and reserves to absorb these potential losses, which could cause more small institutions to fail.

But he also noted that the vast majority of national banks are strong and will be able to withstand the declining asset quality.

While we may be seeing some initial signs of improvement in some asset classes as the economy begins to recover, it will generally take time for problem credits to work their way through 536870913 544499813

He pointed to a few bright spots in the banking sector, such as early signs that credit card delinquency rates are declining.

Dugan, who supervises the depository bank units of institutions such as Bank of America and JPMorgan, said commercial real estate exposure is the greatest challenge facing many banks and 536870913 544499813 (Reporting by Karey Wutkowski; Editing by Andrea Ricci)

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