WASHINGTON - Thrift regulators will formally propose today a detailed formula for reducing interest rate risk that could eventually apply to commercial banks that invest heavily in home mortgages.
The proposal would require about 80 thrifts to raise $170 million in capital, according to Tony Cornyn, a deputy assistant director of the Office of Thrift Supervision.
The 500 or so banks that have a majority of their portfolios invested in housing-related finance also would eventually have to follow the OTS rule, predicted Jonathan Fiechter, the OTS's deputy director for Washington operations. for institutions with high-risk profiles ... it shouldn't be [applied] by charter, it should be [applied] by the nature of the institution," Mr. Fiechter said in an interview.
Adoption Seen by Yearend
The OTS proposal revises an earlier one that the industry criticized as too complicated. While the new plan is subject to revisions, officials said they expect it to be adopted largely as proposed by yearend.
Earlier this summer, the three federal banking agencies published their own interest rate risk proposals. Their plans require much less information from banks than the OTS regulation would require of thrifts.
The goal of both bank and thrift regulators is the same: to measure the effect that rising or falling interest rates have on the value of an institution's assets and liabilities.
Different Approaches
But the regulators go about this in very different ways. For example, the banking agencies are planning to merely ask banks to report the dollar volume of loans with maturities of, say, 20 years.
The OTS will ask thrifts to report the dollar volume of all mortgage loans by interest rate, such as all mortgages made at 8%, at 9%, and so on.
"The banking agencies don't break down the mortgage portfolio at all," Mr. Cornyn explained. "So they are making very gross assumptions about what is in a bank's portfolio."
The OTS regulation will provide a better estimate of prepayment risk when rates fluctuate, Mr. Fiechter said.
The other main difference is that the banking agencies plan to monitor risk by assessing the effect a 1% swing in rates would cause. The OTS doubles that standard by measuring the impact of 2% fluctuations.
But Mr. Fiechter was quick to note: "Our rule is not twice as tough as the banking agencies."
That's because a bank deemed to have above-normal interest-rate exposure will required to add enough capital to make.it the decline in net worth by a 1% swing in rates. Thrifts, however, will only have to add half the capital needed to compensate for a 2% change in interest rates.
A Competitive Disavantage?
Mr. Fiechter said he is concerned about the competitive disadvantage thrifts will face if they are forced to comply with the much more detailed OTS rule if savings banks only have to follow the much simpler banking agency regulation.
Nearly 920 thrifts will show above-average interest rate risk. But equity at 837 of those thrifts already exceeds the minimum levels that will be required by the new rule.
The interest rate risk at 1,183 thrifts will be deemed normal, Mr. Cornyn said.
Mr. Flechter said OTS needs a more thorough measure because thrifts are more vulnerable to changes in interest rates. Banking regulators "are taking a one report fits all approach," he said.
And that's fine because 65% to 75% of all banks are not susceptible to major problems caused by increases or decreases in interest rates, he said.
But some thrift industry leaders are questioning whether the more precise OTS rule is worth the cost of collecting all the data needed to make it work.
"It's not clear that there is a significant payoff for the added analysis," said Brian Smith, executive vice president at the Savings and Community Bankers of America. "It's sort of like using a sledgehammer to crack a nut."
Because the OTS rule is "substantially more complex" than the regulation being contemplated by the banking agencies, Mr. Smith suggested that the OTS rule should be applied to thrifts with substantial interest rate risk.
The rest of the thrift industry ought to be able to use the simpler banking agency test, he said.
Less Data from Smaller Thrifts
An exemption of sorts is being carved out for thrifts with less than $300 million in assets with risk-based capital in excess of 12%. These small, well-capitalized thrifts will be allowed to fill out a "short form," meaning they will not have to turn over as many details about assets and liabilities to OTS, Mr. Flechter explained.
In other action expected today, the OTS will reveal a series of rules it plans to drop to reduce regulatory burden.
On Wednesday, the agency released other proposals for comment:
* Thrifts would have to begin on Oct. 1 to disclose how well they meet capital requirements.
* The qualified thrift lender test would be eased so that only 65% of an institution's assets must be related to housing finance. The types and amounts of assets that can be counted as housing-related also would be expanded to include such things as an unlimited amount of stock in a Federal Home Loan bank.
* Risk-based capital rules would be eased in two ways. First, the capital needed to back loans for multifamliy apartment buildings would be halved. Second, thrifts would be allowed to count several types of equity investments as capital. such as Fannie Mae and Freddie Mac stock.
