Creating a thrift of unprecedented size poses a risk management challenge for regulators as well as for the managers of Washington Mutual Inc.

After swallowing H.F. Ahmanson & Co., Washington Mutual will be three times larger than any other institution the Office of Thrift Supervision regulates. It is likely to become the first thrift required to host on-site examiners who will continuously inspect the company's operations.

"The agency is going to insist upon a much more thorough examination relationship rather than reviewing the institution once a year," said John F. Downey, former OTS executive director of supervision.

"You're talking about an institution that will be responsible for around 20% of the industry's assets-that's a real concentration."

The risk managers at Washington Mutual will face new challenges as well.

"Companies in high-growth mode need to make sure their risk management departments keep up-especially if the asset is on the books," said Timothy F. Ryan, a partner with Price Waterhouse in Boston. "Hedging strategies that made sense when you had $20 billion in servicing may not make sense when you are $100 billion plus."

Mortgage industry observers said the new Washington Mutual will need to be more concerned about financial hedging strategies because both Washington Mutual and Ahmanson have been trying to become more like mortgage banks-securitizing loans and retaining the servicing rights.

Once the deal for Ahmanson closes in the third quarter, Washington Mutual will own the servicing rights for nearly $160 billion of mortgages.

Before Washington Mutual began its acquisition binge in California with the purchase of American Savings in 1996, it was only servicing about $20 billion of mortgages.

In a low-interest-rate environment, loan runoff is a major concern for mortgage companies because they will not get the income they would have gotten from servicing the loans. As a result, most large mortgage companies purchase derivatives that tend to rise in value when interest rates fall.

Mortgage-servicing experts said Washington Mutual will need to focus more than ever on hedging its servicing against interest-rate risk especially since it has expanded its portfolio of servicing rights so quickly.

Compounding this is the fact that adjustable-rate mortgages are more difficult to hedge than fixed-rate ones, said Robert N. Husted, principal of MIAC Risk Management Services, New York, a consulting firm that assists mortgage lenders with their hedging strategies.

But other observers said Washington Mutual should not have any more risk than other lenders because of its strong origination capabilities. The combined thrift will be on track to originate $33 billion of mortgages in 1998.

No doubt, every move Washington Mutual's managers make will be pored over by federal regulators.

After the $9.9 billion merger is complete, Washington Mutual's assets will near $150 billion, making it the seventh-largest financial institution, behind First Union Corp.

Beyond size, more than 80% of Washington Mutual's deposits will be concentrated in one state-California, with its sometimes-volatile real estate market and economy.

"There isn't any doubt that the risks posed by large institutions have greater implications for the banking system," said John E. Ryan, Mr. Downey's successor as the OTS' top cop.

Also, because Washington Mutual will do most of its business outside its home state, regulators plan to take a hard look at how regional offices are run to ensure that they have sufficient authority and management talent to run the day-to-day operations, Mr. Downey said.

"The management team has a great track record but you have to scrutinize the infrastructure and administrative organization," he said. "When you have a multistate operation, you have to make sure the people in regional offices are capable of handling local problems."

How the two companies' computer systems are combined, including year- 2000 preparation, also will be analyzed.

Finally, the agency is likely to insist that the furiously expanding Washington Mutual retain enough manpower. The deal is expected to result in the loss of 3,500 jobs, or 11% of the combined company's work force.

"Whenever you look at a merger or acquisition a lot of analysis goes into justifying the personnel cuts and cost reductions," Mr. Ryan said.

But Steve Freimuth, executive vice president of lending administration for Washington Mutual, expressed confidence that the company would be able to manage the financial and regulatory risks.

"We've done 21 acquisitions in the last 10 years," he said. "People here at the bank are very used to this type of environment."

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