WASHINGTON- Rising interest rates have so far this year sapped 4% of the thrift industry's market value, according to the first estimates of the effect of recent rate increases.

The Office of Thrift Supervision, which measured the rate hikes' effect, said the industry has done a good job of reducing its interest rate sensitivity.

Acting OTS director Jonathan L. Fiechter said, "I am comforted by our analysis, which suggests that thrift management is concentrating on managing the amount of interest rate risk that their institutions are taking on."

The thrift industry was thrashed by rate increases in the early 1980s, which pushed hundreds of S&Ls into insolvency.

Thrift-by-Thrift Report

The OTS is the only banking agency which has already added an interest-rate-risk component to its capital requirements. To measure rate risk, it feeds data gathered from thrifts nationwide into a sophisticated computer model, and notifies individual thrifts each quarter of their interest rate sensitivity.

It is hard to say what effect recent rate increases have had on commercial banks. The banking agencies have not yet incorporated an interest-rate-risk component into their risk-based capital rules, and therefore do not measure banks' rate risk industrywide.

The interest rate environment that has steadily boosted bank and thrift profits ended this year with a series of rate hikes. On Feb. 4, the Federal Reserve raised interest rates for the first time in five years, and it has raised rates three times since then.

Monitoring of Risks Urged

While OTS is pleased by the industry's performance to date, officials arc urging thrifts to take steps to monitor their interest rate risk more closely.

"In this environment in particular, given the increased volatility in interest rates, it is important that institutions continue to focus on this area," Mr. Fiechter said. Thrifts should, "carefully review our quarterly reports to them, which show their sensitivity to rate changes."

Short-term rates have risen 1.25% this year. The first OTS measurements show that if rates rose another 1.25%, the industry's value would have fallen about 12% since March 31.

Snapshot of the Industry

Since the end of the first quarter, the industry's value fell roughly 4% as rates rose 75 basis points, the agency said. The OTS figures do not measure hits to capital, but rather show at a moment frozen in time what the effects of interest rate changes would be if the books of the entire thrift industry were immediately marked to market.

"You are not going to see a lot of red ink or anything like that, but profit margins will narrow," said Anthony G. Cornyn, the OTS' deputy assistant director for policy. "Going forward, earnings will be under pressure and interest earnings will be under pressure."

Starting Sept. 30, thrifts will have to hold additional capital if they have above-normal interest rate risk exposure. Just 138 thrifts had above normal exposure at the end of the first quarter, but if rates increase another 1.25%, 200 would fall in that category, the OTS estimates.

More Vulnerable than Banks

Thrifts remain more exposed to interest rate shifts than commercial banks because S&Ls' portfolios generally hold more mortgage loans, producing longer-term assets, which are funded by shorter-term liabilities. To reduce that risk, institutions have added more adjustable-rate mortgages to their books and have hedged their portfolios, some with derivatives, Mr. Cornyn said. Just over 100 thrifts use derivatives.

Rising interest rates cause mortgage prepayments to slow lengthening the duration of those assets on the books, Mr. Cornyn explained. "Consequently, a rise in rates has the perverse effect of making thrift institutions more exposed to a further rise in interest rates," he cautioned.

Robert R. Davis, chief economist of the Savings and Community Bankers of America, said, "Once upon a time, a rate increase would have hurt more and for a longer period of time."

"There is always interest rate risk when you are running a financial intermediary," Mr. Davis said. "The name of the game is monitoring and controlling that risk." OTS Top 10 What S&Ls should doas interest rates rise 10 Place risk management at top of agenda. 9 Review exposure limits. 8 Check adequacy of internalrisk measurement systems. 7 Analyze OTS exposure reports. 6 Increase frequency of simulations. 5 Address unwanted exposures. 4 Think in terms of total return. 3 Remember: There is a fool in every market, 2 Don't speculate on interest rates. 1 How to be brilliant: "Just think of someone who is doingsomething stupid, and do the opposite."

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