Credit Exposure From Bank Derivatives Continues to Decline

WASHINGTON, DC — Credit exposure for the top nine banks holding derivatives continued to decline in the fourth quarter of 1995 to 250 percent of risk-based capital, the Office of the Comptroller of the Currency (OCC) announced today. The decline continued throughout 1995 from the first quarter when credit exposure from derivatives was 336 percent of risk based capital.

Revenues from bank trading activities, including derivatives, declined somewhat in the fourth quarter after three quarters of revenue increases. Revenues in the fourth quarter were positive, however, for the top 9 banks that conduct 94 percent of derivatives activities.

Credit Exposure: Overall credit exposure from derivatives declined $12 billion in the fourth quarter to $228 billion. This decline is mostly the result of a decline in interest rates and a decline in various market volatilities in the fourth quarter as well as the continuing use by banks of bilateral netting to reduce credit exposure. (See table 4, graphs 5a and 5b).

Revenues: Revenues from trading activities, which include off-balance sheet derivatives and cash instruments, declined by $377 million in the fourth quarter, compared to an increase of $312 million in the third quarter.

Fourth quarter revenues from trading activities were $1.6 billion. Revenues for the year were $6 billion. (See table 7, graph 6).

Revenues from foreign exchange contracts declined by $169 million in the fourth quarter. Revenues from interest rate contracts declined by $85 million.

Derivatives Activity: The notional amount of bank derivatives activity declined by $778 billion in the fourth quarter of 1995 to $16.86 trillion. This slight decline is consistent with a pattern of stabilizing or declining notional amounts in previous fourth quarter figures.

The largest decline in activity was foreign exchange derivatives contracts, which declined $555 billion, to $5 trillion. Interest rate derivatives contracts fell by $234 billion, to $11 trillion. (See tables 1, 2 and 3, graphs 1 and 3).

Short-term contracts (maturities less than a year) were down $829 billion in the fourth quarter to $8.27 trillion. Medium-term contracts (maturities of one to five years) increased by $53 billion to $3.59 trillion. Long-term contracts (maturities five years or more) grew by $62 billion to $876 billion. (See tables 10, 11 and 12, graphs 7, 8 and 9).

The number of banks holding derivatives declined by 37 in the fourth quarter, to 558 banks. Nine banks account for 94 percent of derivatives activity.

Market Risk: Banks continue to maintain relative balance in their exposure to market risk. This risk is measured by positive and negative fair values of derivatives portfolios. (Positive fair value shows what a bank's counterparty would owe the bank if its contract were liquidated today; negative fair value shows what the bank would owe the counterparty if the contract were liquidated today.) Relatively balanced bank books mean that the value of positions where the bank could have a gain do not significantly differ from the positions where the bank could have a loss. (See table 6).

Structured Notes: Structured notes and high-risk mortgage securities are held primarily by banks with assets under $1 billion. Both types of securities showed appreciation in the aggregate during the fourth quarter stemming mostly from the decline in interest rates during the quarter. Structured notes were held by 4,273 banks in the fourth quarter, a decline of 110 from the third quarter. (See tables 8 and 9, graphs 10 and 11).

A copy of the tables can be obtained through the OCC Information Line at (202) 479-0141 document number 79634.

Related Link

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