Interest-Rate Lurches Imperil Thrifts, Top Regulator Warns

The cheapest mortgage rates in 18 years are a bonanza for homeowners, but the nation’s top thrift regulator says low rates flash warning signs for savings and loan institutions recovering from a decade of disaster.

The rush to refinance mortgages is pouring fee income into thrifts now, rescuing some from the brink of collapse.

But Office of Thrift Supervision Director Timothy Ryan warned in an interview that thrifts must be wary of loading up balance sheets with low-yielding assets. “Long term, they need to be very cognizant of interest-rate risk,” Ryan said, referring to the mismatch between assets and liabilities on thrifts’ balance sheets.

The thrift disaster of the 1980s partly was triggered by interest rates surging to 18% to 20%. Thrifts faced a huge leap in the cost of money but were locked into low-yielding mortgages, which led to heavy losses.

About a third of the industry collapsed, forcing a government bailout for depositors that is costing more than $500 billion over the next 40 years.

But the renewed threat to thrifts’ earnings in the future from interest-rate swings highlights the importance of an OTS program to calculate thrifts’ exposure.

OTS is blazing the path worldwide for requiring financial institutions to add capital as a cushion against losses from sharp interest-rate changes.

Ryan said he expects OTS to add interest-rate risk factors to its capital standards by early 1993. “That is our goal,” he said.