Though a Federal Financial Institutions Examination Council policy limits the types of of mortgage-backed securities derivatives that regulated financial institutions may hold. there still is concern on the part of an important politician that banks and thrifts are taking unacceptable risks.
Last week. Chairman Donald W. Riegle Jr., D-Mich., of the Senate Banking, Housing and Urban Affairs Committee asked three regulators to study the institutions they oversee to determine whether holdings of MBS derivatives threaten the safety and soundness of the banks and thrifts. The request came June 10 at a hearing on the Bank Insurance Fund, at which the committee heard testimony from John P. Laware, a member of the Federal Reserve Board; William Taylor, chairman of the Federal Deposit Insurance Corporation; and Stephen R. Steinbrink, acting comptroller of the currency.
"I think we do have the potential for a problem (with MBS derivative holdings)," said Riegle." ...I'm concerned about what there is in this sort of appetite-to-grow, appetite-to-find new profitable fields of activity that there can be sort of a gold rush mentality that takes place, where different institutions... can move off into an area that looks very attractive. And it's very hard to monitor, very hard for regulators to keep track of on a real time basis, and I think these derivtive products fall into that category.
"And I think they are precisely the kind of area and zone that, if there's too much of it, and it gets out there in a way where we don't fully understand it until sometime after the fact ... that's the kind of thing that can send us over the edge again in terms of having an exposure that suddenly manifests itself beyond what anybody imagined," Riegle added. "(W)hen you multiply it across the board, I think there could be a real problem.
"So I'm asking each of you to undertake an effort to independently do an assessment of what's going on with the derivative products, what's the rate of growth, what's the level of exposure that's out there, how able are you to track this with respect to your existing regulatory mechanisms," he said.
"It may very well be that we'll want to decide that. when we're using insured deposits, we don't want to use them in that area. that it just imposes too great a regulatory burden. I don't say that's the conclusion, but I think those are the the kinds of questions that are fair to ask."
Riegle's concern comes at a time when the National Association of Insurance Commissioners is working on a model investment law that may limit holdings of MBS derivatives, and a study by the General Accounting Office to determine, among other things, whether investors have been hurt by owning derivatives.
The study was requested by Rep. Edward J. Markey, D-Mass., chairman of the Telecommunications and Finance Subcommittee of the House Energy and Commerce Committee.