The regulators have scrapped a plan to require banks use a standard model to calculate capital for interest rate risk, drawing cheers from industry officials.
"They did the right thing," said Pamela Martin, the manager of regulatory relations for Robert Morris Associates. "Banks treat interest rate risk too many different ways and they are involved in so many different markets that it is just too broad a thing to have a model for."
The agencies instead adopted guidelines explaining how banks should manage interest rate risk, which is the threat to earnings and capital posed by fluctuations in rates. The guidelines also detail the responsibilities of the board of directors and senior management. The agencies also said they would continue to consider interest rate risk - even without the model - when setting a bank's capital requirements.
The Federal Reserve Board on Thursday was the last agency to approve the scaled-back approach. The Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency acted a week before.
Officials at the three agencies said all the models they looked at were either overly burdensome to banks or produced inconsistent results.
"We've never been able to come up with something that is satisfactory," Fed Gov. Edward W. Kelley Jr. said at yesterday's meeting.
Industry officials said they were relieved by the revised proposal, which ended two and a half years of debate over the best way to calculate interest rate risk exposure.
"It is hard to complain about a situation where they would look at a bank individually," said Ronald E. Bowden, chairman and chief executive officer of Nebraska State Bank of South Sioux City.
Mr. Bowden said these individual reviews will ensure that each bank holds the appropriate amount of capital for interest rate risk, a goal a standardized model never could achieve.
Ann Grochala, the director of bank operations at the Independent Bankers Association of America, said the revised proposal is a major victory.
"Some of the banks in earlier drafts were going to be hit with onerous new reporting requirements," she said. "That is no longer there."
Also, banks won't have to worry that a standardized model would require them to hold more capital reserves than necessary, she said. Finally, she said banks proved during the past three years that they can handle significant interest rate fluctuations without new rules.
The new guidelines do advise bank directors to set interest rate risk policy, appoint bank officers to oversee management of interest rate risk, and monitor management's compliance with their directives.
The guidelines recommend that senior management adopt formal risk management procedures outlining who identifies the risk from new products, who oversees measurement systems, and who authorizes exemptions to the policy.
Although the guidelines are not binding, Susan Krause, the senior deputy comptroller for bank supervision policy, said the agencies will use their enforcement powers against institutions that don't adequately manage interest rate risk.
This proposal may not be the last word on interest rate risk models. The agencies said they would reopen the issue once technology improves enough to permit them to devise a meaningful model.
Regulators said future approaches likely would rely on the internal models banks already use rather than a standardized model written by the agencies.
"Might that happen in the future? It could," said A. William Stark, the FDIC's assistant director of the division of supervision. "We are watching the technology change."
Congress required the agencies to adopt interest rate risk policies in 1991. The Office of Thrift Supervision acted in 1993, approving a model that measures interest rate risk. However, the agency has not used the model to set capital standards.
At the banking agencies, debate centered on how the models would measure the long-term affect of interest rate changes. Banking regulators said a basic model works well for institutions that invest primarily in mortgages. But it breaks down when applied to derivatives and other complex financial instruments.