Magazine article American Banker

Money-Centers Took Multibillion-Dollar Hit on Derivatives in 1Q

Magazine article American Banker

Money-Centers Took Multibillion-Dollar Hit on Derivatives in 1Q

Article excerpt

The value of derivatives used by major banks for asset and liability management fell by billions of dollars in the first quarter, according to statistics gathered by Sanford C. Bernstein & Co.

But Bernstein analysts argued that the volatility was hardly cause for alarm, and suggested that there may be a buying opportunity, to the extent that uneasiness about derivatives has dragged the banks stock prices lower.

Analyst Moshe Orenbuch noted that the declines "are not big, big numbers," considering the asset sizes of the banks involved.

Besides, Mr. Orenbuch and money-center analyst Ronald I. Mandle said, the banks' investment in derivatives for the most part worked they way they were supposed to: The losses were at least partially offset by gains in the value of core deposits as interest rates rose.

"Banks have entered into billions of dollars of derivatives transactions for hedging the economic risk of having important amounts of core funds on their balance sheets," the analysts said in a statement to their clients. "Core deposits made many banks' assets more sensitive than they wished to be. [The] derivatives helped satisfy their craving for additional liability sensitivity."

Morgan Stands Out

The analysts said that 21 of the 22 banks with large derivatives portfolios saw the value of their portfolios fall dramatically. The value of J.P. Morgan & Co.'s portfolio remained unchanged.

The analysts said the largest decline was at BankAmerica Corp., whose portfolio lost $1 billion in market value.

At the end of the first quarter, BankAmerica's derivatives portfolio, with $68.3 billion in notional value, carried a market value of $200 million. At yearend 1993, the notional value stood at $46.2 billion and the market value at $1.2 billion.

Citicorp, which held derivatives with a notional value of $168 billion, saw the market value of its holdings decline by $900 million in the first quarter of 1994. …

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