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OCC: Rate Risk Is a Rising Peril

Interest rate risk has taken its place alongside perennial frontrunner credit risk atop the Office of the Comptroller of the Currency's list of risk management worries, said the agency's director of treasury and market risk, Kathryn Dick.

Because mortgages now account for such a significant percentage of bank assets, the industry is vulnerable to swings in interest rates like never before, Ms. Dick told a panel Oct. 28 at U.S. Bancorp Piper Jaffray's Financial Service Conference in New York.

Her worries are something new.

"I can say that in my twenty years this is the first time that credit risk has been challenged by another financial risk," said Ms. Dick.

She believes that large banks have generally done a decent job of hedging against interest rate risks, but that small and mid-sized institutions are leaving themselves in a bad position. She described smaller institutions' lack of derivative use to protect against interest rate risk as "criminal."

Ms. Dick conceded that derivative products for smaller institutions were lagging behind somewhat, but added that there was progress being made that should allow them to hedge more effectively. She described Financial Accounting Standard 133 as a "significant deterrent" to hedging.

Also, the OCC will likely issue guidance on risk management for increasingly popular home equity loans, Ms. Dick announced.

As a percentage of total assets, the amount of home equity loans among banks is still fairly small, said Ms. Dick. But customers are not used to this type of loan, and the OCC would like to see financial institutions take a more active role in risk management for these products.

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