The Office of Thrift Supervision is still planning to publish a final regulation by the end of the year to set an interest rate risk component for risk-based capital., according to an OTS spokesman.
Meanwhile. the agency is digesting the comments of affected parties. including some who are advising it to make use of a model proposed for banks by the Federal Reserve Board.
The revised OTS system. which updates a methodology originally proposed in December 1990. would require tariffs with more than a 'normal' level of interest rate risk to maintain capital in addition to the 8% of core capital that must now be held in reserve for investment assets.
OTS defines "above normal" as any decline in the market value of portfolio equity (resulting from a 200 basis point interest rate shock) that is greater than 296 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 has proposed a substantially different rule that would be tied to a 100-basis point change in rates. The Fed would require an excess interest rate risk to be met out of Tier 1 capital; the OTS plan would permit the use of both Tier 1 and Tier 2 capital.
The Savings and Community Bankers Association wrote that the difference in approaches by the Fed and OTS can generate substantial discrepancies and inequities in crucial balance sheet components. SCBA is aware that the OTS modeling has been revised to better reflect the rate sensitivity of adjustable rate mortgages as an asset/liability management tool
Given the difference in the model approach. however. the banking agencies will not penalize [an adjustable rate mortgage] as long it is at least 100 basis points below its lifetime cap.
"The OTS model. by contrast. will more likely assign a probability of the rate cap being triggered (afortiori in the plus-200-basis point yield curve case) and limit the ARM contribution to IRR management through a pricing effect. Though the ors reasoning is theoretically reasonable. such competitive divergence on a core thrift asset in a key market is intolerable. Efforts to assure more accurate IRR capitalization must not introduce fresh competitive inequities."
SCBA said it had asked 15 thrifts to run the OTS and Fed models on their financial statements. Based on that analysis. the SCBA said it concluded that the Fed approach should be used as a 'universal 'pre-screening' filter to detect those institutions for which IRR is significant and where added capitalization is appropriate." (See page4 for an analysts by an official of one of the 15 thrifts that participated in the SCBA test.)
The Mortgage Bankers Association. as it did with the Fed proposal, raised questions about the impact of the IRR rule on off-balance sheet servicing and treatment of mortgage pipelines. (For summary of MBA's comments to the Fed. see The Mortgage Marketplace. Nov. 2, page 4.)
"Savings associations will be discouraged from retaining originated servicing if the institution must increase its capita] for holding OBS servicing." the MBA wrote. "Off-balance sheet servicing currently provides the OTS with a capital 'safety net.' because an institution may immediately increase its capital position by selling its off-balance sheet servicing.
Why then would the OTS want to discourage this activity? Under no circumstances should OBS servicing be included in the [market value of portfolio equity] calculation. because the servicing poses no capital risk. On the contrary. If rates rise 200 basis points. there is tremendous potential sales value in the servicing.