regulations were adopted by the Federal Home Loan Bank I Board (FHLBB) that allowed FHLBB-regulated savings institutions to trade exchange-listed futures and option contracts. The set of permissible activities was changed from allowing limited positions in mortgage futures to permitting unlimited trading in debt futures and option contracts, provided that the trading reduces interest-rate risk. The new regulations place limits only on thrift long futures and short put positions which, when combined, are not allowed to exceed the thrift's short forward mortgage commitments plus 10% of the thrift's assets.
This study examines thrift usage of their new futures trading flexibility using financial data reported to the FHLBB. This overall investigation of actual thrift futures activity complements existing evidence from previous surveys of thrift futures participation (Booth, Smith, and Stolz, 1984) and provides further perspective on trading abuses at savings institutions already reported in the popular press (Knight, 1989). Although Koppenhaver (1990) examines futures usage by commercial banks, the hedging situation for thrifts is somewhat different due to thrifts' heavy emphasis on mortgage lending. A separate study of thrift futures participation is therefore merited. The importance of a thorough investigation of this issue is magnified by the large losses suffered by the government insurer of thrift deposits in the 1980s. Problems and oversights in all thrift regulations must be detected to avoid the excessive risk-taking activities, bad management, and outright fraud that leads to losses (Barth, Bartholomew, and Bradley, 1989).
THRIFT INTEREST-RATE RISK AND FUTURES HEDGING PROCEDURES
A thrift balance sheet usually consists of long-term prepayable mortgage assets financed by short-term deposit liabilities. The mismatch of maturities and prepayment rights implies interest-rate risk, which can be defined as fluctuations in market value caused by changes in interest rates. Although interest-rate changes also can affect short-term manipulatable figures, i.e., book income and capital, fluctuations in market value should be of primary concern to both thrifts and regulators since they represent the realizable present value of all future cash flows. The risk of market value fluctuations caused by interest-rate changes can be hedged or
The useful comments of the reviewers at the Journal of Futures Markets are gratefully acknowledged.