OTS Delays Rule On More Capital For Rate Risks

WASHINGTON - Thrift regulators have decided to wait at least 16 months to implement a controversial rule that would require many institutions to set aside more capital to cover interest rate risk.

The Office of Thrift Supervision said Tuesday that it needs the time to work out glitches in the proposal's centerpiece: a complex computer model designed to measure the effects of rate swings on S&L portfolios.

The OTS wants thrifts to predict how a rise or fall in interest rates of 200 basis points would impact the market value of their assets. They would have to set aside capital equivalent to half the estimated decline.

Big Overestimate Feared

Risk management experts have told the thrift office that the model is badly flawed and might overestimate by billions of dollars the amount of capital needed by the industry.

The thrift agency's decision to revamp the controversial computer model and test it at a cross-section of institutions before adopting a final rule in late 1992 was welcomed by industry officials and risk management experts.

"That's a blessing, because it was a horrible rule," said Cliff Myers, president of Myers Interest Rate Risk, a Scottsdale, Ariz., consulting firm. "There's no question, it would have miscalculated the risks for about two-thirds of the thrift industry."

Thrifts Seen as Vulnerable

There is wide agreement in financial circles that commercial banks and thrifts need to measure interest rate risk and cushion themselves against loss. Thrifts are considered to be particularly vulnerable to rate jolts, because their deposit liabilities typically reprice faster than their assets, which consist chiefly of mortgages and mortgage securities.

But the OTS' proposal, in the works for nearly four years, left many observers uneasy.

"There were a whole lot of errors and disparities," said Hal Connell, president of Sendero Corp., Scottsdale. "You just can't apply a formula to 2,000 institutions."

Mr. Myers said the OTS' approach was flawed because it relied on national averages to gauge interest rate risk, even though rates on deposits and loans vary widely from community to community.

There were also complaints about applying the new rules to thrifts, but not banks.

"It's not a problem unique to the thrift industry," said William C. Ferguson, chief executive of Ferguson & Co., Dallas. "The banks are becoming a nation of real estate lenders," thus increasing their risk profile.

The retreat from the proposal raises the chances that thrift regulators will wait until banking regulators are on board before proceeding with an interest-rate risk rule.

Uniformity Held Likely

"Ultimately, we're probably going to see all of the regulators devise a somewhat more uniform approach," said Brian Smith, executive vice president of in charge of Chicago operations for the U.S. League of Savings Institutions.

Banking regulators from 12 industrialized nations, working under the aegis of the Basel Committee on Banking Supervision, have been struggling for more than three years with ways to control interest-rate risk.

Rule or no rule, banks and thrifts should be doing more to manage credit, liquidity, and interest-rate risk, Mr. Connell said. "Only a few institutions are really, really keyed into working on it all the time."

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