In the world of risk management, interest rate exposure is often viewed as a distant second in urgency to the risk that enough borrowers will default to cause earnings and capital problems.

But while credit risk may be king, one company has news that may make bankers take added notice of their rate risk.

According to Sheshunoff Information Services, community-based financial institutions have generally taken on more interest rate exposure in recent years.

A Sheshunoff survey of 200 banks and thrifts found that a two- percentage-point move in rates - either up or down - would have caused median net interest income at small banks to decline by 7.19% as of June 1998, compared with a 6% hit a year earlier.

Though these banks' rate exposure had fallen by September - a 200-basis- point rate shock then would have prompted a 6.37% decline in net interest income - community banks still appear to be taking on more rate risk over the long run, said Robert Colvin, a Sheshunoff managing director.

"I think that this trend of added interest rate exposure will continue," he said. "That's because margins have been squeezed and banks will have to take on more risk to expand that margin."

Sheshunoff is a unit of Thomson Financial Corp., which is also the parent of American Banker.

According to Mr. Colvin, small banks - to a greater degree than in the recent past - have been "mismatching" the maturities of their assets and liabilities in pursuit of higher spreads at a time when the yield curve is relatively flat.

For example, a bank might lend at longer average maturities than normal to gain a little extra profit, thereby increasing the maturity gap between loans and deposits. While the strategy is quite common, a sharp and unexpected rise in interest rates would squeeze margins, since the shorter- maturity deposits would reprice upward more quickly than the loans.

Mr. Colvin said he sees the falloff in interest rate exposure from June to September last year as an aberration rather than a reversal of the trend.

Based on conversations with bankers, he said, it appears an unusual number of loan prepayments led to a shortening of average loan maturities.

What are small banks doing to get a grip on their rate exposure?

According to the Robert Morris Associates' report "Beating the Odds: A Community Banker's Guide to Risk Management," two-thirds of the small banks surveyed use a consultant or vendor-derived asset/liability model to aid in measuring rate risk.

Banks most commonly measure interest rate gap, net interest margin, liquidity, and trends in interest-sensitive assets and liabilities.

Most respondents in the study stress-test their investment portfolios, yet only one-third stress-tested their commercial and industrial loans and commercial real estate loans.

At Amarillo National Bancorp in Texas, officials subject their balance sheet to a mock 200-basis-point rate shock. The results are currently no cause for worry, said Bill Ware, an executive vice president.

"We are in a stable inflation environment, and we don't think that interest rates will fluctuate that much," he said. "I have a lot of confidence in" Federal Reserve Board Chairman Alan Greenspan.

Still, Mr. Ware argued that bankers must take measurement of interest rate risk more seriously, if only because regulators are focusing more on it than in the past.

Said Sheshunoff's Mr. Colvin: "To do this well, you need more detailed analysis, and most banks don't do that."

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