WASHINGTON -- The thrift industry's market value has declined by roughly 11% as a result of this year's interest rate increases, federal regulators are estimating.
Nevertheless, regulators say the industry's strong capital levels have helped it weather the interest rate storms. The industry's underlying strength provides a marked contrast to the situation of the late 1970s and early 1980s, when volatile rates wreaked havoc on thrifts. Officials note that the 11% decline is an unrealized drop in value.
"It takes a while for these sharp rate increases to work their way through capital" under generally accepted accounting principles, said Anthony G. Cornyn, the Office of Thrift Supervision's acting director for research and industry analysis.
Only "if rates were to rise and remain at a high level for a long time, some institutions would see their capital erode and earnings erode," he added.
The Federal Reserve Board has raised interest rates six times this year, starting Feb. 4. It has raised its target for the federal funds rate -- the rate banks pay each other for overnight loans -- by a total of 2.5% to 5.5% and the discount rate -- which it charges banks for short-term loans -- by 1.75% to 4.75%.
Acting OTS Director Jonathan L. Fiechter said, "I would expect very few -- if any -- thrifts to fail as a consequence of the recent run-up of interest rates." That is because the industry is overwhelmingly well capitalized. At worst, any losses would likely be borne by shareholders rather than taxpayers or the deposit insurance funds, he said.
The OTS's calculations are unique among bank regulators. It is the only agency which has added a congressionally mandated interest-rate risk component to its risk-based capital standards.
As a result, thrifts send complex data to the agency each quarter, which allows the OTS to track interest rate sensitivity industry-wide as well as in individual institutions.
The rules don't go into effect until the end of the first quarter next year, but the agency has been collecting the data since March 1991. Once in effect, thrifts that have too much exposure to interest rate risk for three straight quarters must raise capital.
The interest rate risk rules require thrifts with above-normal exposure to interest rate changes to carry more capital to guard against any losses. The OTS measures what would happen to the institution's market value with an immediate interest rate increase or decrease of 1%, 2%, 3%, and 4%.
Any institution whose market value would decline in three consecutive quarters by more than 2% of assets with a 2% interest rate "shock" under the OTS model must come up with more capital, Mr. Cornyn said.
As of March 30 -- the first period measured after the Fed had began raising rates, the OTS model shows that a 2% rate increase would result in an 11% decline in the thrift industry's market value, while a 3% rate increase would cause a 19% drop.
Those declines would not immediately be realized, and in fact might never come to fruition, regulators stress.
"Institutions can alter their balance sheets between the time they start raising rates until the end of the rate rise," Mr. Cornyn pointed out. "They can be changing the composition of their assets and liabilities."
Already, thrifts have adjusted by increasing their holdings of adjustable-rate mortgages, he said.
Had the new capital requirements been in effect by the end of the third quarter, the OTS would have required 77 thrifts to boost their capital because of interest rate risk levels, Mr. Cornyn said. But most already held enough capital to cover the new requirements, he said.
At the end of the third quarter, 234 thrifts -- roughly 15% of institutions the OTS regulates -- would have weighed in with above- normal interest rate risk.
The interest rate increases have not yet significantly hurt the industry's earnings. Last year, OTS-regulated thrifts earned $4.9 billion. This year he expects the industry to earn roughly $4.7 billion.
The OTS third-quarter calculations showed that if the Fed were to raise rates by 1%, the industry's market value would decline by 9%.
Most of that decline has likely already been realized, since the Fed raised rates by 75 basis points on Nov. 14.
If rates go up an additional 1.25% from today's levels, the industry's value would decline by one-fifth, and if rates rise 2.25% from today's levels, the industry would face a 32% decline in market value.
It is unclear whether the central bank will raise rates at its next board meeting, which is set for Dec. 20.
