Nearly 65% of the banks the Federal Deposit Insurance Corp. has examined for interest rate risk have escaped with bare-bones inspections.
The new exams, which began in December, range from simple to complex depending on a bank's internal controls and the amount of interest rate risk it faces.
"I was very apprehensive beforehand, but it turned out to be an absolute cakewalk," said Myron L. Pfeifle, president and chief executive of Bank Center First, a $112 million-asset institution in Bismarck, N.D.
William A. Stark, the FDIC's assistant director of supervision, said the agency is responding to complaints of examiner overkill. "We've tried to design a procedure where examiners can feel comfortable just stopping at some point," he explained.
"Instead of picking everything apart, examiners only pursue a problem or question as far as they need to," added Edwin A. Opstad, chairman of the $30 million-asset Washington State Bank, Federal Way, Wash. "That looks pretty good to me."
The enthusiasm for the exams is quite a turnaround from September 1993, when bankers criticized the interest rate risk plan proposed by the FDIC, the Comptroller's Office, and the Federal Reserve Board. That plan would have set capital requirements for banks vulnerable to shifts in interest rates. In addition, it would have mandated that banks use a regulatory model to measure risk.
The agencies went back to the drawing board. Finally, in September 1995 they abandoned the regulatory model and the capital requirement. Instead, they issued a joint policy statement outlining the responsibilities of bank officers in managing interest rate risk. Banks also were required to divulge additional interest rate information in their quarterly call reports, beginning with the ones filed June 30.
The OCC is expected to release detailed interest rate risk exam procedures in May. Until then, the agency is incorporating interest rate risk scrutiny into its new risk-based safety and soundness exams.
The Fed updated its examination manual in November to incorporate the joint policy statement. Like the FDIC, Fed and OCC examiners spend less time in banks with strong internal controls or low levels of interest rate risk.
The FDIC broke out he results of its first interest rate risk exams because Chairman Ricki Helfer wanted a sense of how banks were faring, Mr. Stark said.
Of the 260 exams completed so far, 169 of the banks received a simple "level one" inspection. Sixty-five banks, or 25%, received a "level two" exam, while the remaining 10% received a "level three" inspection, he said. None of the banks were subjected to the "level four" exam, the most stringent. Only in the last two levels do examiners actually study a bank's internal interest rate risk model.
"Based upon our experiences so far, we've found that in 90% of the institutions, we don't need to go into an in-depth examination of their model," Mr. Stark said. "It's created a much more efficient examination environment."
Specifically, FDIC examiners have a checklist for each level. For level one, the bank must be rated Camel 1 or 2, and must:
Have adequate personnel assigned to manage interest rate risk.
Keep high-risk mortgage securities, mortgage servicing assets, and structured notes below the level of Tier 1 capital.
Avoid off-balance-sheet derivative positions.
If the bank meets these criteria, the exam is over. However, if a bank doesn't satisfy every condition, the examiner may delve deeper by checking the bank's level and stability of earnings, net interest margins, and depreciation of its securities portfolio.
Even when the bank doesn't pass the initial tests, however, a supervisor may end the exam, Mr. Stark said. "Examiners can use their judgment," he said. "They can take a close look at the cause of the level one failing, and decide it isn't necessary to go to level two."
If the exam progresses to level three, FDIC examiners will assess the internal interest rate risk model for accuracy and check its underlying statistical assumptions.
If the model does not accurately calculate the bank's risk, or if the assumptions are considered unrealistic, examiners will try to work with management to refine the model.
If that doesn't work, or if the bank is not using a model despite the presence of interest rate risk, the process moves to level four. Examiners will document safety and soundness concerns related to interest rate risk, direct bank management to correct the problems, and may even bring enforcement actions or require additional capital.