Derivatives Holdings Up 14% at Banks In 1st Quarter

WASHINGTON - Despite highly publicized problems with derivatives, banks sharply increased their holdings of the instruments in the first quarter.

With interest rate and currency contracts leading the way, the volume of derivatives in bank portfolios rose $2.2 trillion, or 14%, from the previous quarter, according to a report released Wednesday by the Office of the Comptroller of the Currency.

"This is by far the largest increase we've seen since I began tracking these numbers," said Douglas Harris, senior deputy comptroller for capital markets in the Comptroller's office.

Mr. Harris said he did not see the increase as alarming in itself but said his agency would be looking at the data more closely in coming weeks to "see if any one or more particular banks need to get some special scrutiny."

Some big banks, notably Bankers Trust Co., have been hurt by their derivatives dealings for customers. Many smaller banks, meanwhile, have lost money on structured notes and other derivatives held for their own accounts.

The total notional amount of derivatives in U.S. commercial bank portfolios was $17.99 trillion at March 31. Banks' current and future credit exposure on these derivatives totaled $268 billion.

Mr. Harris said the big rise in derivatives activity was due to bank clients' trying to temper the volatility of sharp currency fluctuations and unstable interest rates in the first quarter of this year.

Derivatives business was concentrated among nine banks, which together held 93% of the notional value of all derivatives in bank portfolios - up from 86.2% in 1991. Several securities firms not included in Wednesday's report also are big derivatives players, but the Comptroller's office assumes they trail the biggest banks.

Chemical Bank led the field in total derivatives contracts, with $3.634 trillion, and the Morgan Guaranty Trust Co. unit of J.P. Morgan & Co. had the greatest credit exposure, at $54 billion.

Most of the OCC report consisted of information on derivatives that had never been asked of banks before the latest call reports.

Among the new items was banks' revenue from trading derivatives. Citicorp's Citibank was the biggest winner, with $340 million in trading revenue in the quarter. Bankers Trust, the only big loser, was down $132 million.

Overall, U.S. banks took in $1.095 billion in derivatives trading revenue.

The report also revised the measurement of credit exposure - the maximum loss a bank could suffer if all contracts sour - allowing banks to net contracts with a single counterparty instead of simply adding up the replacement value of all their contracts.

Even with this more conservative estimate of credit risk, banks' exposure went up. The top nine banks' credit exposure averaged 312% of risk-based capital, up from 269% the previous quarter. Bankers Trust had a credit-exposure-to-capital ratio of 588.7%; Morgan Guaranty, 570.5%.

This may sound high, Mr. Harris said, but "it's dwarfed by the exposure on traditional banking activities like mortgages, commercial loans, and securities held for investment purposes."

He added, "What's more important than the actual level of risk is the ability of the bank to manage and control risk."

Lewis W. Teel, executive vice president in charge of trading risk management at BankAmerica Corp.'s Bank of America, which had the lowest credit-exposure-to-capital ratio of the big derivatives dealers, said he didn't think the number meant much.

"It's the equivalent of loans outstanding at any given time, and it doesn't really take into account the credit quality of the exposure," he said. "You really have to know a lot more than just knowing that number."

Mr. Harris said the vast majority of derivatives activity was trading done for bank clients. But many banks, including small ones, also held billions of dollars in structured notes and high-risk mortgage securities for their own accounts - and virtually all had lost money on them.

The largest concentration of structured-note holdings was in the portfolios of banks with less than $250 million of assets; 3,487 of them held a total of $8.17 billion in notes as of March 31. That market value was down 3.99% from a book value of $8.51 billion.

Overall, U.S. banks held $20.58 billion of structured notes, which had depreciated in value an average of 3.51%.

"The structured note market is basically dead," Mr. Harris said.

High-risk mortgage security holdings were distributed more evenly across the spectrum of banks. U.S. banks held $3.44 billion of the instruments, which had depreciated from book value an average of 6.07%.

High-risk mortgage securities held by smaller banks suffered the greatest loss in value, with an average depreciation of 9.16%.

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