Both Tier 1 and Tier 2 capital can be counted to meet the requirements of the interest rate risk rules proposed last week in a revised form by the Office of Thrift Supervision. The less complex system devised by the Federal Reserve Board for banks requires that any excess interest rate risk be met solely out of Tier 1 capital. (See The Mortgage Marketplace, June 29, page 1.)

The revised OTS system, which updates a methodology originally proposed Posed in December 1990, would require thrifts with more than a "normal" level of interest rate risk to maintain capital in addition to 8% of core capital that must now be held in reserve for investment assets.

OTS defines as "above normal" any decline in the market value of portfolio equity (resulting from a 200 basis point interest rate shock) that is greater than 2% of a thrift's assets. The amount of additional capital required would be equal to half the difference between the interest rate risk and 2% of the market value of its assets.

The Fed-developed model would use a 1% swing in rates.

The regulations would exempt thrifts with less than $300 million in assets and who have risk-based capital of more than 12%.

The OTS estimates that about 80 thrifts would have to increase their capital by about $170 million to meet the standards. The agency said a total of about 920 thrifts will show above-average interest rate risk under the model but they have adequate capital to cover it.

The OTS made some important changes in the data required for the risk assessment. The current reporting form lumps together all fixed-rate single-family mortgage loans and securities and reported their value as a single balance.

The new consolidated maturity/rate (CMR) schedule will require thrifts to report mortgages and securities separately in three categories: 30-year, 15-year and balloon.

Currently, in the off-balance sheet section of their reports, institutions aggregate positions that are similar but not identical. The new schedule CMR will collect the data in a way that permits thrifts to, list their positions individually. This, the OTS said, will simplify the reporting and eliminates the need for the model to make assumptions about the nature of the positions.

The comment period on the proposed regulations ends Nov. 2.

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