NR 96-34
  March 14, 1996
  
   Credit Exposure From Bank Derivatives Continues to Decline
  
  WASHINGTON, DC -- Credit exposure for the top nine banks
  holding derivatives continued to decline in the fourth quarter
  of 1995 to 250 percent of risk-based capital, the Office of the
  Comptroller of the Currency (OCC) announced today.  The decline
  continued throughout 1995 from the first quarter when credit
  exposure from derivatives was 336 percent of risk based
  capital.
   
  Revenues from bank trading activities, including derivatives,
  declined somewhat in the fourth quarter after three quarters of
  revenue increases.  Revenues in the fourth quarter were
  positive, however, for the top 9 banks that conduct 94 percent
  of derivatives activities.
  
  Credit Exposure:  Overall credit exposure from derivatives
  declined $12 billion in the fourth quarter to $228 billion. 
  This decline is mostly the result of a decline in interest
  rates and a decline in various market volatilities in the
  fourth quarter as well as the continuing use by banks of
  bilateral netting to reduce credit exposure.  (See table 4,
  graphs 5a and 5b).
  
  Revenues: Revenues from trading activities, which include off-balance sheet derivatives and cash instruments, declined by
  $377 million in the fourth quarter, compared to an increase of
  $312 million in the third quarter.   
  
  Fourth quarter revenues from trading activities were $1.6
  billion.  Revenues for the year were $6 billion.  (See table 7,
  graph 6).
  
  Revenues from foreign exchange contracts declined by $169
  million in the fourth quarter.  Revenues from interest rate
  contracts declined by $85 million.  
  
  Derivatives Activity:  The notional amount of bank derivatives
  activity declined by $778 billion in the fourth quarter of 1995
  to $16.86 trillion.  This slight decline is consistent with a
  pattern of stabilizing or declining notional amounts in
  previous fourth quarter figures.    
  
  The largest decline in activity was foreign exchange
  derivatives contracts, which declined $555 billion, to $5
  trillion.  Interest rate derivatives contracts fell by $234
  billion, to $11 trillion.  (See tables 1, 2 and 3, graphs 1 and
  3). 
  
  Short-term contracts (maturities less than a year) were down
  $829 billion in the fourth quarter to $8.27 trillion.  Medium-term contracts (maturities of one to five years) increased by
  $53 billion to $3.59 trillion.  Long-term contracts (maturities
  five years or more) grew by $62 billion to $876 billion.  (See
  tables 10, 11 and 12, graphs 7, 8 and 9).
  
  The number of banks holding derivatives declined by 37 in the
  fourth quarter, to 558 banks.  Nine banks account for 94
  percent of derivatives activity.
  
  Market Risk:   Banks continue to maintain relative balance in
  their exposure to market risk.  This risk is measured by
  positive and negative fair values of derivatives portfolios. 
  (Positive fair value shows what a bank's counterparty would owe
  the bank if its contract were liquidated today; negative fair
  value shows what the bank would owe the counterparty if the
  contract were liquidated today.)   Relatively balanced bank
  books mean that the value of positions where the bank could
  have a gain do not significantly differ from the positions
  where the bank could have a loss.  (See table 6).
  
  Structured Notes:   Structured notes and high-risk mortgage
  securities are held primarily by banks with assets under $1
  billion.  Both types of securities showed appreciation in the
  aggregate during the fourth quarter stemming mostly from the
  decline in interest rates during the quarter.  
  
  Structured notes were held by 4,273 banks in the fourth
  quarter, a decline of 110 from the third quarter.  (See tables
  8 and 9, graphs 10 and 11).
  
  A copy of the tables can be obtained through the OCC
  Information Line at (202) 479-0141 document number 79634.
  
                             # # #
  
  The OCC charters, regulates and examines approximately 2,800 national banks
  and 70 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.
                           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.
                               FACT SHEET
       DERIVATIVES DATA - FOURTH QUARTER 1995 CALL REPORT
  
  
  GENERAL
  
  The notional amount of derivatives in commercial bank
  portfolios decreased by $778 billion in the fourth quarter to
  $16.86 trillion.  (This figure excludes spot foreign exchange
  contracts, which decreased by $299 billion to $305 billion as
  of 12-31-95). Although notional amounts have increased steadily
  over the last few years, this quarter's slight decline is
  consistent with a pattern of stabilizing or declining notional
  amounts that have been present in previous fourth quarter
  numbers.  During the fourth quarter, the notional amount of
  interest rate contracts fell by $234 billion, to $11.10
  trillion. Foreign exchange contracts fell by $555 billion, to
  $5.39 trillion, while commodity and equity contracts grew by
  $12 billion, to $378 billion.  The number of commercial banks
  holding derivatives decreased by 37 in the fourth quarter to
  558. [See Table 1, 2, & 3, Graph 1 & Graph 3]
  
  Off-balance sheet derivatives are concentrated in the largest
  banks.  Nine commercial banks account for 94% of the total
  notional amount of derivatives in the banking system, with 97%
  accounted for by the top 25 banks (these figures include spot
  foreign exchange).  For the years  1991 through 1994, the
  concentration of derivatives in the top nine banks was 86%,
  91%, 91%, and 92% respectively. [See Table 3 & Graph 4 for
  concentrations excluding spot foreign exchange]
  
  Approximately 66% of the notional amount of derivative
  positions were comprised of interest rate contracts with an
  additional 32% represented by foreign exchange contracts. 
  Commodity and equity contracts were only 2% of the total
  notional amount.  The composition of contract types remains
  relatively unchanged since 1991.  [See Table 3 & Graph 3]
  
  Over-the-counter (OTC) and exchange-traded contracts comprised
  86% and 14%, respectively, of the notional holdings as of
  fourth quarter, which is virtually the same as third quarter. 
  OTC contracts tend to be more popular with banks and bank
  customers due to the flexibility in tailoring them to meet risk
  management needs.  However, OTC contracts tend to be less
  liquid than exchange-traded contracts, which are standardized
  and fungible. [See Table 3]
  
  The notional values of short-term contracts (i.e. with
  remaining maturities of less than one year) are down $829
  billion, or 9.1% from third quarter, to $8.27 trillion. 
  Medium-term contracts (i.e., remaining maturities of one to
  five years) increased by $53 billion, or 1.5%, to $3.59
  trillion, and long-term contracts (i.e., maturities of five or
  more years) increased by $62 billion, or 7.6%, to $876 billion.
  [See Tables 10, 11 & 12, Graphs 7, 8 & 9]
  
  RISK
  
  Notional amounts are helpful in measuring the level and trends
  of derivatives activity.  However, these amounts are a
  misleading indicator of risk exposure. Beginning in the first
  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 maturity data).
  
  In addition to the Call Report changes, the risk-based capital
  guidelines were amended as of the fourth quarter (1) to revise
  and expand the set of conversion factors used to calculate the
  potential future credit exposure of derivative contracts, and
  (2) to 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 the attached
  table reflect those new factors.  However, the attached 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 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 this
  choice is left up to the bank, the attached table reflects only
  available Call Report information.  Thus, 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 fourth quarter saw a $12 billion decrease in total credit
  exposure from off-balance sheet contracts to $228 billion. 
  Relative to risk-based capital, total credit exposures for the
  top nine banks averaged 250.3% of capital compared to 272.9% at
  the end of the third quarter.  This decrease in exposure is
  largely the result of declines in both U.S. interest rates and
  in various market volatilities, as well as the recognition of
  continuing benefits from bilateral netting.  Credit exposure
  would have been significantly higher without the benefit of
  bilateral 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, Graph 5a & Graph5b]
  
  Non-performing contracts remained at nominal levels.  For all
  banks, the book value of contracts past due 30 days or more
  aggregated only $18 million or .0001% of total current exposure
  from all derivatives 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 94.1% of the
  contracts for trading purposes, primarily customer service
  transactions, while the remaining 5.9% are held for their own
  risk management needs.  The trading contracts of these banks
  represent 91.4% of all notional values in the commercial
  banking system.   Banks below the top 25, which use derivatives
  primarily for risk management transactions, hold 71.68% 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 are maintaining
  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 $219.1 billion in positive fair values and
  $219.2 billion in negative fair values.  These  figures
  represent a slight decline from third quarter.  The decline in
  positive fair values corresponds to the reduction in credit
  risk mentioned above, while the decline in negative fair values
  means that banks owe their counterparties less.  Note that
  while gross fair value data are very useful in depicting more
  meaningful market risk data, users must be cautioned that these
  figures do not include the results of cash positions in the
  trading portfolio.  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 $14.4
  billion, while the gross negative fair value of these contracts
  aggregated to $10.1 billion.   Readers must be cautioned,
  however, that these results 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 non-trading activities.  Note that the revenue data reported in
  Table 7 and Graph 6 reflect figures for the fourth quarter
  alone, and do not reflect year-to-date data.
  
  Relative to the third quarter, the fourth quarter resulted in a
  decrease in trading revenues from cash and derivatives
  activities of $377 million, totaling $1.6 billion in the fourth
  quarter, with the top nine banks accounting for 84% of that
  amount. Year-to-date trading revenue for 1995 from cash and
  off-balance sheet positions was $6.14 billion.  In the quarter,
  revenues from interest rate contracts fell $85 million to $879
  million, while revenues from foreign exchange contracts
  decreased $169 million, to $592 million.  Revenue from other
  trading contracts, including equities and commodities
  contracts, fell $122 million, generating $95 million in
  revenues, with virtually all of that amount 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 fourth quarter.  Non-traded derivatives
  contributed $509 million, or .69% to the $73.8 billion in gross
  revenues of banks with derivative contracts in the fourth
  quarter.  These figures reflect a decline of $268 million from
  the third quarter (third quarter contributed $777 million to
  gross revenues). 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 were largely confined to banks with
  total assets under $1 billion. The fourth quarter aggregated
  numbers indicated that market values (fair values) exceeded
  book values by $54 million for high risk mortgage securities, a
  $93 million dollar improvement from the third quarter.  Market
  values were below book values by $146 million for structured
  notes, a $175 million dollar improvement from the third
  quarter. This overall appreciation from third to fourth quarter
  stems from the decline in interest rates in the fourth quarter.
  Additionally, the decline in interest rates resulted in higher
  mortgage prepayments and resulting maturity of some issues,
  thus reducing the aggregated book value of high risk mortgage
  securities from third to fourth quarter.  For all banks with
  high-risk mortgage securities, the book value of holdings
  averaged 1.4% of total assets, compared to 1.5% in the third
  quarter.  Average depreciation to capital declined to .33%,
  from .62% in the third quarter. 
  
  The numbers indicate that for banks with structured notes, the
  book value of holdings to total assets averaged 2.8%, compared
  to 3.1% in the third quarter, while average depreciation to
  capital declined to .52%, from .77% in the third quarter.  The
  number of banks reporting high-risk mortgage securities
  decreased by 36, to 569 in the fourth quarter.  The number of
  banks reporting structured notes on their books decreased in
  the fourth quarter by 110 to 4,273.  [See Table 8 & Table 9,
  Graphs 10 & 11]
  
  
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