With the regulatory spotlight shifting to off-balance-sheet risk, bankers and investors have shown keen interest in assessing banks' swap exposure to Olympia & York Developments Ltd., the crippled real estate developer.

Gerald Corrigan, president of the Federal Reserve Bank of New York, told bankers in January that "the growth and complexity of off-balance-sheet activities and the nature of the credit, price, and settlement risk they entail should give us all cause for concern."

Olympia & York's active use of the swap market seemed like it might be a case in point. But despite initial market fears that banks had a high swap exposure, the developer's bankruptcy filing shows surprisingly low levels of swap debt. The major risk to banks remains direct loans, the filings show.

"I think the ultimate losses on the hard assets could well be larger than the losses on the swaps," said Diane Glossman, an analyst at Salomon Brothers.

Top Banks Have Positions

The largest swap exposure among U.S. banks is held by a subsidiary of BankAmerica Corp., at $15.4 million. A Canadian subsidiary of J.P. Morgan & Co. follows with a swap vulnerability of $13.5 million, while Citicorp stands closely behind with $11.1 million at risk.

Bank of Nova Scotia has a much larger exposure at $31.5 million, while Royal Bank of Canada has a much more modest $6.7 million at risk.

The grand swap total as revealed in the filings, however, is relatively small: $78.2 million. That is well below the amount many individual banks have lent to the company.

Replacement Involved

The banks' swap exposure - the amount owed to them by Olympia & York as a result of interest rate changes in the banks' favor - represents the amount that banks would have to pay to replace their Olympia contracts, based on current market conditions.

Though banks are owed more from the developer than they are obligated to pay, they would have to pay new swap partners a premium to take over their positions since Olympia & York is not a reliable debtor.

The bankruptcy filing may not, of course, tell the whole story. Banks could well have credit exposures to affiliates of Olympia & York that are not yet in bankruptcy. Citicorp, for one, disclosed in a quarterly filing with the Securities and Exchange Commission that its exposure to the real estate units of Olympia - including loans, loan guarantees, and swaps - was $380 million at the end of the first quarter.

But it said that the accounting did not disclose its exposure to other units of the giant development concern.

For now, however, the swap market appears to be taking the matter in stride. Swap rates barely moved the day after Olympia & York filed for bankruptcy.

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