Two decades of government hand-holding on interest rate risk might be over for thrifts.
With the Office of the Comptroller of the Currency slated to absorb the Office of Thrift Supervision next summer, the future of the personalized interest rate risk assessment that the OTS supplied quarterly to thrifts remains undetermined.
For thrifts, particularly small ones, the potential termination of a service they have long relied upon is another burden and added cost they are expecting in connection with the Dodd-Frank law.
"There are only so many hours in the day," said Michael J. Mellon, the president of American Savings FSB in Munster, Ind. "As community bankers, there is already a myriad of things we do. So to throw one more thing at us can really make it overwhelming."
The net portfolio value model, as the OTS calls it, was born out of the savings and loan crisis, which was at least partially attributed to interest rate risk.
The model was designed to address the inherent sensitivity that thrifts face, given their retail deposit focus and mortgage lending business. It is supposed to spot interest rate risk trends earlier and identify outliers.
The process involves taking confidential data and using it to estimate the market value of the thrift's balance-sheet and off-balance-sheet exposures and then analyzing how the market value fluctuates with up to 300-basis-point shocks. From there, thrifts are told whether their interest rate risk is minimal, moderate, significant or high.
The industry has lauded the model, and Harvard University honored it in 1995.
"It is an area where the OTS has really excelled," said Kip Weissman, a lawyer at Luse Gorman Pomerenk & Schick. "It is a valuable tool and is user-friendly and is an instance where the OCC can learn from the OTS."
Most of the industry uses the modeling.
Scott Ciardi, the director of risk modeling and analysis at the OTS, said thrifts with less than $1 billion of assets can use the report as their primary source of interest rate risk modeling. Also, thrifts with less than $500 million of assets that maintain total risk-based capital ratios above 12% for two quarters are not required to submit the additional data used in the modeling. Still, 90% of the thrifts that fit the optional criterion request the report.
"This is something our examiners have relied on and many of the institutions have relied on," Ciardi said. "So we are getting questions."
For its part, the OCC said it is still weighing its options on the issue.
"The OCC and OTS are discussing regulatory reporting issues, including the schedule used for reporting [interest rate risk] exposures," the agency said in an e-mail. "The agencies expect to issue a proposal for industry comment in the near future."
Bankers said that, though they are concerned about the modeling report, it is, admittedly, just one of potentially thousands of policies and procedures that the agencies are trying to reconcile. Dodd-Frank abolishes the OTS.
At July 21, 2011, authority over thrift holding companies will go the Federal Reserve Board, and the OCC will become the regulator for all federal thrifts. The OTS is to dissolve 90 days later.
"Regulators only have so many hours in the day, too," Mellon said.
Michael Solomon, the managing director of risk management at the OTS, said it is proud of the value the modeling provides and that the ability to scale the service to national banks has been discussed. National banks with large asset concentrations could benefit from the modeling, he said.
"We are seeing if it makes sense to have the supervisory model on a large platform," Solomon said.
Ciardi said that the model also has not-yet-tapped capabilities. For instance, if the regulator called for more-granular data, it would be able to predict credit risk.
Weissman said he hopes the OCC not only keeps the modeling but also decides to offer it to national banks.
Thomas J. Parliment, the president of Parliment Consulting Services Inc., said that is unlikely; small national banks have managed to monitor interest rate risk without a regulator report, he said.
"The OCC has a stance of 'we will provide the general parameters, but it is your job to do it,' " Parliment said. "I don't think that is too much to ask of a small bank."
Parliment said he realizes that interest rate sensitivity is greater at thrifts but said he sees this as having the potential to empower executives.
"There is no reason for you not to take control of interest rate risk yourself," Parliment said. "The report from the OTS is useful, but it is a poor substitute for the due diligence on the part of the institution. They owe it to themselves."
Though he does not expect the OCC to continue the service, Parliment said the regulator would probably take a methodical approach to phasing it out, perhaps giving thrifts up to 18 months to make other arrangements. "The last thing the OCC is going to do is throw small thrifts into the fire," he said. "There will be some kind of transition."
Consultants and executives said that a thrift with less than $200 million of assets could expect to pay roughly $10,000 a year for third-party modeling and upward of $20,000 for customized modeling software that would be used in-house.
"It is more than 'free from the OTS,' but it isn't Draconian," Parliment said.
Brian Kiley, the chief financial officer of the $88 million-asset First East Side Savings Bank, said he uses both a third-party report and the OTS report to assess his thrift's rate risk. The latter is not a resource he would like to lose.
"We blend the two to help us plan for the future," Kiley said. "Clearly, we would have the ability to use third-party if it weren't there. We'd deal with it."
Mellon said his $185.4 million-asset thrift relies on the OTS report as its outside voice for rate risk to go with its intimate knowledge of the balance sheet. He expects the reports will go away.
American Savings' board has recently began discussing alternatives, Mellon said. He added that it is not all bad. For instance, the OTS report only shocks the portfolio 300 basis points, but the industry has adopted 400 basis points as the best practice.
American Savings is considering a third-party service, and Mellon said he is also thinking about buying modeling software. But in addition to being the more expensive option, it is also more time-consuming since it would require training someone to model interest rate risk and use all the additional modeling capabilities such as credit risk.
"Getting the model set up is not an overnight process because you want to make sure you are really going to utilize it," Mellon said. "The last thing you want is a $20,000 paper weight."
