The three federal bank regulatory agencies and the Office of Thrift Supervision made it clear last week that they want any interest rate risk capital requirements to be designed so that smaller institutions are not unduly burdened and that the focus is on what is expected to be a relatively small number of banks and savings and loans whose investments pose a substantial risk to their capital positions.

About 20% of all FDIC-insured banks could have higher capital requirements under the new rules, the Fed estimated. The Federal Deposit Insurance Corporation Improvement Act requires that the interest rate risk rules be published in final form no later than June 19, 1993.

A principal concern of the regulators is interest-rate-sensitive investments, especially some of the high risk derivatives of mortgage-backed securities. Major financial institutions have developed their own risk measures, most of which are more sophisticated than those being developed by the regulators.

The Federal Reserve Board approved a notice of proposed rulemaking that describes a system for measuring interest rate risk it has developed in conjunction with the Office of the Comptroller of the Currency and the FDIC. It suggests that for every dollar of interest rate risk above a norm for all institutions, an extra dollar of capital must be set aside. The Fed, both in the proposal itself and during the June 24 meeting at which it approved the proposal, emphasized its concern about smaller institutions and its intention to craft the least burdensome requirements possible while ensuring that risky investments are covered by additional capital.

The OTS, too, asserted its intention to propose interest rate risk regulations that would not be unnecessarily burdensome. Jonathan Fiechter, OTS deputy director for Washington operations, said at a June 23 regulatory conference of the Savings and Community Bankers of America that the OTS probably will exempt smaller institutions, perhaps those with assets under $250 million, from the interest rate risk requirements. The thrifts want an even higher cutoff point but are satisfied that OTS at least is sympathetic to their concerns.

Fiechter said the additional capital that would be required for excessive interest rate risk would be added to the 8% of core capital that must currently be held in reserve for investment assets. He added, however, that after a period of experimentation--perhaps six to nine months--leverage capital requirements might be reduced to balance off the additional capital set aside for interest rate risk. He said OTS hopes to publish a proposed regulation by the end of July.

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