Banks markedly increased their holdings of swaps and similar derivatives in the second quarter - despite a wave of publicity about losses on the instruments.

By one key measure. banks' holdi,ngs of off-balance-sheet derivatives increased by more than 10% in the period. The notional amount of the instruments - the base used for calculating payments - increased to $15.3 trillion from $13.9 trillion. according to Veribanc Inc., Wakefield, Mass.

Among the 10 banks with the largest holdings, Citibanlc posted the sharpest increase - 38%. First National Bank of Chicago was next, with a 23% rise. (See table on back page.)

The rapid increase m derivatives holdings by banks could well provide ammunition to regulators and members of Congress concerned that too much risk is being taken.

Throughout this year, there has been widespread attention on derivative losses by big corporations, colleges, and municipalities. Just this week, it was disclosed that a money market mututal fund for small banks suffered losses form altype of derivative called structured notes.

The new statistics "could very well be interpreted" as a sign that banks are taking on more risk, said Warren G. Heller, director of research at Veribanc. Mr. Heller, however, argued that the statistics show that derivatives are a profitable business for banks.

He cited a 31.8% climb in the replacement costs of banks' derivative contracts during the second quarter.

In other words, the value of the holdings have been rising faster than the national amount.

"The fact that they are in the money' so much is a sign of good management," he said.

"Most of the problems occurred at small shops that didn't have the expertise to handle it."

Banks, he said. are clearly managing their risks, even if some of those trading with the banks can't.

"For the banks, more of them are winners in the transactions," he said. "It's a measure of success," he said.

The replacement costs of Citicorp's holdings, $37.6 billion, led the industry. Following close behind was Chemical Bank Corp., with $36.2 billion.

Continental Bank was the only one of the top 10 holders to register a dip in replacement 6osts during the second quarter. The value fell to $1.5 billion from $1.6 billion.

Veribanc culled its statistics from regulatory reports. It focused on such off-balance sheet derivatives as swaps, options and forward contracts.

Some other types of derivatives, such as collateralized mortgage obligations, are not included in the data.

During the quarter, 704 banks had derivatives in their portfolios, off from 713 banks in the first quarter but up from 661 a year earlier, Veribanc said.

The 10 banks with the largest derivatives holdings accounted for 92.7% of all banks' holdings and 95% of the industry's replacement costs

Mr. Heller pointed out that the growth in the market was about what it has been over the past eight quarters.

He said the use of some derivatives - such as the exotic and higher profit instruments - may have actually slowed in the quarter.

"We're just sarting to see how volatile the market is from quarter to quarter," he said. "But standard hedging continues at banks."

Among the leading banks. Chemical had the largest notional amount of derivatives, building its portfolio to more than $3 trillion, from $2.7 trillion at the end of the previous quarter.

Citibank, a close second with a notional amount of $2.8 trillion, up from slightly more than $2 trillion in the first quarter, recorded the greatest increase among the top 10 banks.

Only two of the top ten decreased theft derivatives holdings. Continental's portfolio fell to $132 billion from $145 billion, and Morgan Guaranty Trust Co. decreased its holdings to $2.2 trillion from $2.4 trillion.

"I expect to see the growth continue," Mr. Heller said.

"As a hedge tool, the use of derivatives will increase, barring the regulators wrapping it up in red tape and making it an unprofitable business."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.