NR 96-97
September 13, 1996

     Derivatives Activity Jumped $1.2 Trillion In 2nd Quarter
                 To Record Level Of $19 Trillion

WASHINGTON, D.C. -- The amount of bank derivatives activity
increased significantly in the second quarter of 1996, rising by
$1.2 trillion to a record $19 trillion, the Office of the
Comptroller of the Currency (OCC) announced today.  The notional
amount of derivatives activity has more than doubled since the
end of 1992, when it stood at $8.8 trillion.  

For the nine largest banks that dominate the U.S. derivatives
market, the average percentage of credit exposure to risk based
capital rose in the second quarter to 244 percent.  These nine
banks account for 94 percent of the total notional amount of
derivatives in the banking system.  The number of banks holding
derivatives decreased by 42 in the second quarter to 507.

With trading revenue from interest rate contracts leading the
way, total trading revenue in the second quarter was $1.9
billion, down slightly from the record $2 billion the quarter
before.  

The OCC reports quarterly on the status of U.S. derivatives
activity.  Following is a summary of the report:

Derivatives Activity: The notional amount of bank derivatives
activity rose by $1.2 trillion in the second quarter to $19
trillion.  The notional amounts of interest rate and foreign
exchange contracts, which account for 98 percent of all
derivatives activity, rose to $12.5 trillion and $6.1 trillion
respectively.  Segregated by type, $8.1 trillion in second
quarter derivatives transactions were futures and forward trades;
$6.7 trillion were swaps; and $4.2 trillion were options.

Risk Exposure: The average percentage of credit exposure to risk
based capital for the top 9 banks with derivatives rose in the
second quarter to 244 percent.  The increase in credit risk
exposure during the second quarter is largely due to the growth
in derivatives volumes and the related increase in the future
add-on portion of the credit exposure calculation.  Credit
exposure would have been significantly higher without the benefit
of bilateral netting agreements.  Non-performing contracts
remained low, with the book value of contracts past due 30 days
or more totaling only $16 million.

Revenues: Trading revenue declined by $62 million to $1.9 billion
in the second quarter, a 3 percent drop from the first quarter. 
The top nine banks involved in derivatives trading realized 86
percent of the nearly $2 billion in revenue during the second
quarter.   A third of trading revenues from cash and derivatives
activities was attributable to Morgan Guaranty Trust, which
realized $634 million.  These revenue data include both cash and
derivatives trading activities. 

High-Risk Mortgage Securities/Structured Notes:   Banks reporting
either structured notes or high-risk mortgage securities were
largely those banks with total assets of less than $1 billion. 
The book value of these instruments exceeded the market value by
$349 million, a deterioration of $151 million from the first
quarter.  The number of banks reporting structured notes on their
books decreased in the second quarter by 196 to 3,850.

                              # # #

The OCC charters, regulates and examines approximately 2,800
national banks and 66 federal branches and agencies of foreign
banks in the U.S., accounting for more than half the nation's
banking assets.  Its mission is to ensure the safety and
soundness of the national banking system.

                            FACT SHEET
        DERIVATIVES DATA - SECOND QUARTER 1996 CALL REPORT

GENERAL

The notional amount of derivatives in commercial bank portfolios
increased by $1.2 trillion in the second quarter to $19 trillion. 
(This figure excludes spot foreign exchange contracts, which
decreased by $2.5 billion to $560 billion).  During the second
quarter, the notional amount of interest rate contracts rose by
$698 billion, to $12.52 trillion.  Foreign exchange contracts
increased by $476 billion, to $6.13 trillion, while commodity and
equity contracts increased by $16 billion, to $394 billion. The
number of commercial banks holding derivatives decreased by 42 in
the second quarter to 507.  [See Tables 1, 2, and 3, Graphs 1 and
Graph 3.]

Approximately 66 percent of the notional amount of derivative
positions was comprised of interest rate contracts with an
additional 32 percent represented by foreign exchange contracts. 
Commodity and equity contracts accounted for only 2 percent of
the total notional amount.  The composition of contract types
remains relatively unchanged since 1991. 
[See Table 3 and Graph 3.]

Off-balance sheet derivatives continue to be concentrated in the
largest banks.  Nine commercial banks account for 94 percent of
the total notional amount of derivatives in the banking system,
with 98 percent accounted for by the top 25 banks (these figures
include spot foreign exchange). [See Table 3 and Graph 4 for
concentrations excluding spot foreign exchange.]

Over-the-counter (OTC) and exchange-traded contracts comprised 86
percent and 14 percent, respectively, of the notional holdings as
of second quarter, which is virtually the same as first quarter
1996.  [See Table 3.]  OTC contracts tend to be more popular with
banks and bank customers because they can be tailored to meet
firm-specific risk management needs.  However, OTC contracts tend
to be less liquid than exchange-traded contracts, which are
standardized and fungible. 

The notional amounts of short-term (i.e., with remaining
maturities of less than one year) contracts are up $509 billion
from the first quarter, to $9.27 trillion.  Contracts with
remaining maturities of one to five years increased by $179
billion, to $4.11 trillion, and long-term (i.e., with maturities
of five or more years) contracts increased by $105 billion, to
$1.09 trillion. [See Tables 10, 11 and 12, Graphs 7, 8 and 9.]

RISK

Notional amounts are helpful in measuring the level and trends of
derivatives activity.  However, these amounts may be misleading
indicator of risk exposure. Beginning in the second quarter of
1995, the Call Report provided data that improve disclosure and
understanding of the relative riskiness of bank activities
involving derivatives.  Some of the data provide immediate
information (e.g., fair values and credit risk positions) while
other data will be more useful over time in evaluating trends
(e.g., revenue and contractual maturity data).

In addition to the Call Report changes, the risk-based capital
guidelines were amended as of the second quarter of 1995 to (1)
revise and expand the set of conversion factors used to calculate
the potential future credit exposure of derivative contracts, and
(2) recognize the effect that qualifying bilateral netting
arrangements will have on the potential future credit exposure
for derivative contracts.  Contracts with the longest maturities
(i.e., over five years) are now subject to new, higher conversion
factors.  New conversion factors were also established that
specifically apply to derivative contracts related to equities,
precious metals, and other commodity contracts.  The credit
exposure calculations in Table 4 reflect those new factors. 
However, that table does not reflect the effects of bilateral
netting on potential future credit exposures.  Under the new
risk-based capital guidelines, banks have the option of either
calculating their netted potential future credit exposure on a
counterparty basis or approximating their netted potential future
credit exposure on an aggregate basis (so long as the method
chosen is used consistently and is subject to examiner review). 
Since available Call Report information does not reveal the
method chosen by the bank to report the impact of netting on
future credit exposure, the total credit exposures reported here
represent upper bounds.  If a bank has a legally valid bilateral
netting arrangement, potential future credit exposure could be
decreased.

The second quarter saw a $13 billion increase in total credit
exposure from off-balance sheet contracts to $235 billion. 
Relative to risk-based capital, total credit exposures for the
top nine banks averaged 244.1 percent of capital in the second
quarter, compared to 233.7 percent at the end of the first
quarter.  This increase in exposure is largely due to the growth
in derivative volumes and the related increase in the future add-on portion of the credit exposure calculation. However, credit
exposure would have been significantly higher without the benefit
of bilateral netting agreements.  The extent of the benefit can
be seen by comparing the gross positive replacement cost from
Table 6 to the bilaterally-netted current exposures shown on
Table 4. [See Table 4, Table 6, Graph 5a and Graph5b.]

Non-performing contracts remained at nominal levels.  For all
banks, the book value of contracts past due 30 days or more
aggregated only $16 million, or .0001 percent of total current
exposure from derivatives contracts.  As of the second quarter
1996, banks with derivative contracts reported $19 million in
credit losses from off-balance sheet derivatives.  This number
represents the year-to-date charge-offs incurred from off-balance
sheet contracts. These figures reflect both the current healthy
economic environment and the relatively high credit quality of
counterparties and end-users with whom banks currently engage in
derivatives transactions.

The Call Report data reflect the significant differences in
customer bases and business strategies among the banks.  The
preponderance of trading activities, including both customer
transactions and proprietary positions, is confined to the very
largest banks.  Smaller banks tend to limit their use of
derivatives to risk management transactions.  The banks with the
25 largest derivatives portfolios hold 93.6 percent of the
contracts for trading purposes, primarily customer service
transactions, while the remaining 6.4 percent are held for their
own risk management needs.  The trading contracts of these banks
represent 91.5 percent of all notional values in the commercial
banking system.  Banks below the top 25, which use derivatives
primarily for risk management transactions, hold 72.7 percent of
their contracts for purposes other than trading.  [See Table 5]

The gross negative and gross positive fair values of derivatives
portfolios show that banks continue to maintain relatively
balanced books; that is, the value of positions in which the bank
has a gain is not significantly different from the value of those
positions with a loss.  In fact, the nine largest banks have
$198.4 billion in positive fair values and $198.3 billion in
negative fair values.  These figures represent a slight increase
from first quarter levels.  Note that while gross fair value data
are very useful in depicting more meaningful market risk
exposure, users must be cautioned that these figures do not
include the results of cash positions in trading portfolios. 
Similarly, the data are reported on a legal entity basis and
consequently do not reflect effects of positions in portfolios of
affiliates, and may result in double-counting bank and non-bank
affiliate positions.  

End-user positions, or derivatives held for risk management
purposes, have aggregate gross positive fair values of $8.3
billion, while the gross negative fair value of these contracts
aggregated to $9.5 billion. Readers must be cautioned, however,
that these figures are only useful in the context of a more
complete analysis of each bank's asset/liability structure and
management process.  [See Table 6.]

REVENUES

The Call Report data include revenue information regarding cash
and derivative trading activities.  The data also show the impact
on net interest income and non-interest income from derivatives
used in non-trading activities.  Note that the revenue data
reported in Table 7 and Graph 6 reflect figures for the second
quarter alone, and are not annualized.

The revenue figures reported for trading activities in the second
quarter of 1996 indicate that the banks with traded derivatives
realized approximately $2 billion from cash and off-balance sheet
derivative contracts, with the top 9 banks accounting for 86.1
percent of these trading revenues.  Relative to the first quarter
of 1996, the second quarter of 1996 resulted in an small decrease
in trading revenues from cash and derivatives activities of $62
million, or 3.1 percent.  As with the first quarter of 1996, over
one third of trading revenues from cash and derivatives
activities are attributable to Morgan Guaranty Trust, which
realized $634 million.

In the second quarter, revenues from interest rate contracts fell
$207 million, to $951 million, while revenues from foreign
exchange contracts increased $104 million, to $733 million. 
Revenue from other trading contracts, including equities and
commodities contracts, rose $42 million, generating $233 million
in revenues; with virtually all of that amount was in the top
nine banks.  [See Table 7, Graph 6]

Derivatives held for purposes other than trading did not have a
significant impact on either net interest income or non-interest
income in the second quarter.  Non-traded derivatives contributed
$802 million, or 1.1 percent to the $74.6 billion in gross
revenues of banks with derivative contracts in the second
quarter.  These figures reflect an increase of $303 million from
the first quarter. Readers must be cautioned that these results
are only useful in the context of a more complete analysis of
each bank's asset/liability structure and management process.

HIGH-RISK MORTGAGE SECURITIES AND STRUCTURED NOTES

The number of banks reporting either structured notes or high-risk mortgage securities remain  largely confined to banks with
total assets less than $1 billion. The second quarter aggregated
numbers indicate that book values exceeded market values (fair
values) by $96 million for high risk mortgage securities, an $84
million dollar deterioration from the first quarter.  Book values
exceeded market values by $253 million for structured notes, a
$67 million dollar deterioration from the first quarter. This
overall depreciation from first to second quarter stems from the
rise in market interest rates in the second quarter.  For all
banks with high-risk mortgage securities, the average book value
of holdings relative to total assets for the second quarter of
1996 was 1.3 percent, compared to 1.4 percent in the first
quarter of 1996.  Average depreciation to capital was .83
percent, compared to .52 percent in the first quarter. 

For banks with structured notes, the average book value of
holdings to total assets declined slightly to 2.4 percent,
compared to 2.5 percent in the first quarter, while average
depreciation to capital increased slightly, to .68 percent,
compared to .60 percent in the first quarter.  The number of
banks reporting high-risk mortgage securities decreased by 6 to
535, in the second quarter.  The number of banks reporting
structured notes on their books decreased in the second quarter
by 196, to 3,850.  [See Table 8 and Table 9, Graphs 10 and 11.]

                              # # #

                        GLOSSARY OF TERMS

Bilateral Netting: A legally enforceable arrangement between a
bank and a counterparty that  creates a single legal obligation
covering all included individual contracts.  This means that a
bank's obligation, in the event of the default or insolvency of
one of the parties, would be the net sum of all positive and
negative fair values of contracts included in the bilateral
netting arrangement. 

Derivative: A financial contract whose value is derived from the
performance of assets, interest rates, currency exchange rates,
or indexes.  Derivative transactions include a wide assortment of
financial contracts including structured debt obligations and
deposits, swaps, futures, options, caps, floors, collars,
forwards and various combinations thereof. 

Exchange-Traded Derivative Contracts: Standardized derivative
contracts transacted on an organized exchange and which usually
have margin requirements.

Gross Negative Fair Value:  The sum total of the fair values of
contracts where the bank owes money to its counterparties,
without taking into account netting.  This represents the maximum
losses the bank's counterparties would incur if the bank defaults
and there is no netting of contracts, and no bank collateral was
held by the counterparties.

Gross Positive Fair Value:  The sum total of the fair values of
contracts where the bank is owed money by its counterparties,
without taking into account netting.  This represents the maximum
losses a bank could incur if all its counterparties default and
there is no netting of contracts, and the bank holds no
counterparty collateral.

High-Risk Mortgage Securities:  Securities where the price or
expected average life is highly sensitive to interest rate
changes, as determined by the FFIEC policy statement on high-risk
mortgage securities.  See also OCC Banking Circular 228 (rev.)  

Off-Balance Sheet Derivative Contracts: Derivative contracts that
generally do not involve booking assets or liabilities (i.e.,
swaps, futures, forwards, and options).  

Over-the-Counter Derivative Contracts: Privately negotiated
derivative contracts that are transacted off organized exchanges. 

Structured Notes:  Non-mortgage-backed debt securities, whose
cash flow characteristics depend on one or more indices and/or
have embedded forwards or options.

Total Risk-Based Capital: The sum of tier 1 plus tier 2 capital. 
Tier 1 capital consists of common shareholders equity, perpetual
preferred shareholders equity with noncumulative dividends,
retained earnings, and minority interests in the equity accounts
of consolidated subsidiaries.  Tier 2 capital consists of
subordinated debt, intermediate-term preferred stock, cumulative
and long-term preferred stock, and a portion of a bank's
allowance for loan and lease losses.