Derivatives risk has dropped sharply this year, as bankers have focused on simpler products.
The Comptroller's office said Thursday that on Sept. 30 the top trading banks' credit exposure from derivatives stood at 104.7% of risk-based capital. The exposure was down from 111.1% of capital on June 30 and 140.9% of capital on March 31.
"We've seen credit exposure decline virtually across the board," said Douglas E. Harris, deputy comptroller for capital markets.
Credit exposure is the amount owed to the bank by its derivatives counterparties.
Mr. Harris said part of the shift was due to a reduction in the value of banks' derivatives contracts. The fall in interest rates over the past 10 months has reduced the amount that counterparties owe under the contracts.
But Tanya Styblo Beder, a principal at Capital Market Risk Advisors, said there are two more important factors in the decline in exposure. The first, she said, is that banks are using conditions like netting arrangements, collateral, and early-termination structures to reduce the level of risk.
Netting agreements permit counterparties to offset gains or losses they may have on a number of separate contracts between them. By pledging collateral against a contract, the bank is able to reduce the risk if the counterparty defaults. And early-termination clauses reduce risk, because contracts that mature in five years are considered less risky than those ending in 10 years.
She said the second factor affecting the exposure level is the bank's mix of clients. Banks like Bankers Trust New York Corp. that were focused on exotic derivative products have experienced a slowdown in business. As the older, more creative products mature, the bank's exposure level declines.
Indeed, Bankers Trust's exposure has fallen from 588.7% of capital at March 31 - the highest level for any of the big trading banks - to 475.5% at Sept. 30.
Credit exposure at Chemical Banking Corp., with nearly $3.6 trillion in notional amount of contracts outstanding, rose to 291.3% of capital from 267.6% of capital at June 30. Likewise, Republic New York Corp.'s credit exposure ratio rose to 145.3% of capital Sept. 30, from 136.6% at June 30.
Both banks, however, have reported declines since March 31. Chemical's ratio has fallen from 375% at the end of the first quarter. And Republic's has declined from 195% over the same period.
Ms. Beder said a bank with a large exposure to a number of high-quality customers may be safer than one with a small exposure to a customer that isn't going to pay.