The growth of derivatives trading has not seriously increased risk-taking by banks, according to Tanya Azarchs, a bank analyst at Standard & Poor's Corp.
Ms. Azarchs said banks that are active derivatives traders typically deal with highly rated corporations and structure interest rate and currency swaps to minimize risk.
"Thus far, we do not see major risks in the derivatives business of the kind that would turn it into the next LDC crisis," she said.
Warnings from Regulators
Her comments, made at a conference earlier this week, contrast sharply with warnings issued by bank regulators in the past year. Federal Reserve Board Chairman Alan Greenspan said recently that banks' derivatives activities will be a principal focus of regulation for the next several years.
And E. Gerald Corrigan, president of the Federal Reserve Bank of New York, had earlier expressed concerns about bank derivatives activities.
Earlier this year, fears about the interest rate swap exposures of J.P. Morgan & Co. and Bankers Trust New York Co. caused their stocks to fall.
Ms. Azarchs said banks' growing derivative income has not come at the price of doing business with high-risk companies or making risky bets on interest rates or foreign exchange.
"A good part of swaps income is spread income: income collected on the differences between income received and payments made on derivative contracts in which the bank is a counterparty," Ms. Azarchs said.
"Spread income has been relatively stable, much like net interest income," she said.
In addition, swaps contracts are of higher quality than loans, said Ms. Azarchs. Participants in swaps and other derivative markets generally carry investment grades, with a large percentage being stronger double-A or triple-A credits.
As a result, the amount of losses due to defaults by swaps market participants is "not a whole lot when you consider the magnitude of the swaps business," Ms. Azarchs said.
The derivatives markets have been a significant source of income for a handful of large banks, including Morgan, Bankers Trust, Citicorp, Chase Manhattan Corp., Chemical Banking Corp., First Chicago Corp., nad BankAmerica Corp.
Trading income at these banks rose from $986 million in 1984 to $5.2 billion last year, including derivatives and other businesses, according to Standard & Poor's.
Derivatives trading accounted for a large portion of the increase. At some money-center banks, derivatives provided half of all trading income, said Ms. Azarchs, who declined to elaborate on specific banks.
She based her comments in part on disclosures provided by the banks, which are not required to give detailed descriptions of their derivatives business in public reports.
Derivatives include interest rate and currency swaps, as well as swaps involving commodities, equities, options, and futures. Dealers offer swaps to corporate customers as a way to raise funds and hedge exposures to changes in markets.
Revenues Unreported
With the exception of Morgan, banks do not report derivative product revenues or net income. Morgan's revenue from swaps and other interest rate contracts jumped from $135 million in 1989 to $626 million last year.
Banks report the market value of their foreign exchange and interest rate swaps. Chase reported interest rate and currency swaps with a market value of $19.1 billion at yearend 1991, the smallest of the U.S. banks active in the markets. Citicorp reported the highest combined total, at $26.6 billion.
