Thrift industry officials are warning federal regulators that a plan to limit interest rate risk will slash profits and force institutions to cut back on mortgage lending.
As part of risk management guidance issued April 22, the Office of Thrift Supervision unveiled new models examiners are using to determine an institution's overall sensitivity to interest rate changes-the "S" component of the Camels rating system.
Under the new plan, examiners measure how a thrift's net equity would weather a change in interest rates of up to 200 basis points.
In more than 20 comment letters to the OTS, industry executives complained that the model forces them to greatly increase the amount of capital they hold, which in turn reduces earnings.
"We do not believe that the benefits ... of such a rigid test outweigh the costs that may be imposed," said D. James Daras, treasurer of Dime Savings Bank of New York.
Industry officials also complained that the OTS is forcing them to abandon their own internal models for managing interest rate risk.
"This 'one size fits all' approach will require institutions to develop and use (the OTS) model even if those institutions have other, more reliable methods of measuring interest rate risk," wrote Russell W. Kettell, president of Golden West Financial Corp. in Oakland, Calif.
Specifically the OTS model measures the impact of interest rate shocks to a thrift's "net portfolio value ratio," or the ratio of net equity to assets. The greater the difference between a thrift's pre- and post-shock net portfolio ratios, the more capital it is required to hold.
The new model was created because the OTS has not updated its guidance on interest rate risk since the "S" component was added to the Camels rating system in 1996.
Because the increased capital requirements leave fewer funds available for lending, industry officials argued that thrifts will try to boost interest margins by making more loans with higher rates of default, such as commercial credits.
"The (OTS) approach will result in the industry having to shorten the duration of its assets, creating more credit risk as they invest in higher- rate, shorter-term commercial loans to compensate for the earnings reduction," wrote Robert F. Felix, chief financial officer of First Federal Savings in East Hartford, Conn. "Let's not revisit the credit risk problems that the industry faced in the last recession."
One thrift executive said the OTS should recognize that earnings capacity can offset interest rate risk.
"We can show that even with a 400 basis-point increase in short-term rates we would still be profitable even if we did nothing," said Guy C. Pinkerton, chairman of Seattle-based Washington Federal Savings.
Mr. Felix said the OTS plan puts thrifts at a competitive disadvantage. "The threshold levels appear to be arbitrarily imposed OTS standards that are not being imposed by other regulatory agencies."
But Kenneth Ryder, OTS executive director of research and analysis, described the models as "preliminary boundaries." He insisted that examiners will take other factors into consideration before grading an institution's interest rate risk management practices. "There really is a lot of room for judgment and discretion," he said in an interview last week.
Thrift executives are not convinced. "Few field examiners will deviate from the established schedule to upgrade an institution to a higher level," Mr. Felix wrote.