HONOLULU - A federal regulator this week said interest rate and liquidity risk in bank securities portfolios is concentrated in community banks, not large regional banks.
Douglas Harris, a senior official at the Office of the Comptroller of the Currency, said the banks with the most serious problems in these areas are almost all banks with less than $1 billion of assets.
He intimated that a number of community banks, if their securities portfolios were marked to market, would be insolvent today. He declined to name the banks or say how many there are.
"The biggest problems we see are at community banks," said Mr. Harris, who is responsible for developing safety and soundness procedures for bank investment practices. "The banks that we are watching most closely are community banks."
Mr. Harris said that of the 780 banks in the 1st District, which includes the Northeast, 60 banks had structured notes equal to 100% of their equity, another 33 banks had a concentration of 100% to 200% of their equity, and one had a concentration equal to 400% of its equity.
Despite these significant interest rate-related problems, Mr. Harris stressed that the his office doesn't intend to take any direct action against the banks.
"We realize we're in an interest-rate cycle," he said. "The biggest problem these banks have in the short run is liquidity."
But Mr. Harris said the OCC has "increased concern" over the interest rate risk in many small banks. When interest rates rose last year, many lower-yielding securities plummeted in value. And with the rise in the use of derivatives, he said, many small banks did not fully understand the risk involved.
He cited a New York community bank whose interest-rate-related losses equalled 25% of its equity. As an example of small banks buying derivatives they don't fully understand, he said a Texas bank took a significant hit on a transaction that was tied to both the German mark and the Spanish peseta.
"The institutions that we are watching most closely are not those with a large transaction book," he said. "They are those with complex transactions where managers don't necessarily understand the risk."
He described this as "intellectual risk," where the people responsible for identifying and understanding the risk - the board and senior managers - have significantly less knowledge of the transactions than those who actually do the trading.