Publications:
Quarterly Derivatives Fact Sheet -- Second Quarter 1997
Read Section: General.......Risk........Revenue.....High-risk Mortgage Securities and Structured Notes
Risk
Notional amounts are helpful in measuring the level and trends of
derivatives activity. However, these amounts may be a misleading
indicator of risk exposure. Data such as fair values and credit
risk exposures are more useful for analyzing point-in-time risk
exposure, while data such as trading revenues and contractual
maturities provide more meaningful information on trends in risk
exposure.
The notional amount of all credit derivatives for the eight
commercially insured institutions that extended credit protection
to other parties was $7.5 billion, an increase of $712 billion
from the first quarter of 1997. The notional amount for the
seven commercial banks reporting credit derivatives that obtained
credit protection from other parties was $18.2 billion, a $6
billion increase from first quarter. The notional imbalance
between aggregate levels of credit derivatives where banks are
receivers of protection and banks which provide protection might
be explained by the fact that the majority of the banks engaged
in credit derivatives are dealer banks, and may be hedging their
derivative positions with cash instruments which are on-balance
sheet and whose usage is not apparent from this off-balance sheet
data. [See tables 1 , 3.]
Credit exposures are reflected in Table 4. However, that table
does not reflect the effects of bilateral netting on potential
future credit exposures (i.e. the add-on component). Under the
current 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 may not reflect
the full impact of netting on future credit exposure, the total
credit exposures reported here are most likely overstated. If a
bank has a legally valid bilateral netting arrangements, potential
future credit exposure could be decreased.
The second quarter realized a $14 billion increase in total
credit exposure from off-balance sheet contracts, to $283 billion.
Relative to risk-based capital, total credit exposures for the
top eight banks increased slightly, to 243.6 percent of
aggregated capital in the second quarter from 241.9 percent in
the first quarter. The increase in the dollar amount of total
credit exposure appears to be largely due to an increase in the
volume of derivatives contracts over the second quarter. Credit
exposure would have been significantly higher without the benefit
of bilateral netting agreements. The extent of the benefit can
be seen by comparing gross positive fair values from Table 6 to
the bilaterally-netted current exposures shown on Table 4. [See Tables 4 , 6.]
Non-performing contracts remained at nominal levels. For all
banks, the book value of contracts past due 30 days or more
aggregated only $15 million, or .005 percent of total credit
exposure from derivatives contracts. As of the second quarter
1997, banks with derivative contracts reported $2.2 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 relatively small loss figures reflect both
the current healthy economic environment and the generally high
credit quality of counterparties and end-users with whom banks
presently engage in derivatives transactions, as well as the
increased use of collateral.
The Call Report data reflect the significant differences in
business strategies among the banks. The preponderance of
trading activities, including both customer transactions and
proprietary positions, is confined to the very largest banks.
The banks with the 25 largest derivatives portfolios hold 94.4
percent of the contracts for trading purposes, primarily customer
service transactions, while the remaining 5.5 percent are held
for their own risk management needs. The trading contracts of
these banks represent 93 percent of all notional values in the
commercial banking system. Smaller banks tend to limit their use
of derivatives to risk management purposes. Banks below the top
25 hold 74 percent of their contracts for purposes other than
trading. [See Table 5.]
The gross negative and gross positive fair values of derivatives
portfolios are relatively balanced; 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, for derivative contracts held for trading purposes, the
eight largest banks have $264.9 billion in gross positive fair
values and $267.2 billion in gross negative fair values. 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 the effects of
positions in portfolios of affiliates.
End-user positions, or derivatives held for risk management
purposes, have aggregate gross positive fair values of $8.5
billion, while the gross negative fair value of these contracts
aggregated to $8.2 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. For example, these figures do not reflect the
impact of off-setting positions on the balance sheet. [See Table 6.]
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