WASHINGTON - Some banks need to use more sophisticated measurements for interest rate risk, according to federal regulators.
The Office of the Comptroller of the Currency issued an advisory letter Wednesday to the chief executives of all national banks urging them to make sure they understand how much risk their banks face as interest rates change.
The changes are needed as interest rates have risen and banks have altered the composition of their portfolios, said Douglas E. Harris, the OCC's senior deputy comptroller for capital markets.
Rate risk has become harder to measure for many banks, because they have increased their holdings in medium- and long-term assets - such as 30-year Treasury bonds - that are sensitive to interest rate changes.
In addition, bank portfolios have grown more complex in recent years, with banks adding assets such as adjustable-rate mortgages with caps on the amount a homeowner must pay in interest, he said.
For those reasons, some banks will need to beef up their interest rate risk monitoring to be sure they can accurately measure long-term effects of interest rate movements, as well as short-term effects.
While many banks already measure the effects of interest rate changes on their earnings, that amounts to a short-term measurement. More banks may need to use a more sophisticated, longer term gauge, Mr. Harris said.
About half of the largest banks now track their interest rate risk by measuring the effect of rate changes on their economic value, which shows the effects of rate changes on long term assets and the future performance of the bank, he said.
Each bank will have to determine for itself whether it is now adequately measuring its rate risk. But Mr. Harris said banks with at least $1 billion of assets and complex portfolios or longer-term rate risk exposure should consider using the more sophisticated value-at-risk model.
The advisory emphasizes that bank management has a responsibility to identify interest rate risk, to measure it, to monitor it and to control it.
"An effective interest rate risk management process should consist of the same fundamental principles used for the management of other financial risks," according to the OCC advisory.
The advisory also said that managers whose banks have significant medium- and long-term positions must be able to assess the long-term impact of rate changes on their institutions earnings and capital.
