Credit Risk for Banks Holding Derivatives Declined in 1995

Journal of Accountancy, June 1996 | Go to article overview

Credit Risk for Banks Holding Derivatives Declined in 1995


A report by the Office of the Comptroller of the Currency (OCC) says the credit exposure for banks holding derivatives continued to decline. The credit exposure from derivatives dropped from 336% of risk-based capital in the first quarter of 1995 to 250% in the fourth. Overall credit exposure from off-balance-sheet contracts fell by $12 billion to $228 billion over the same period, according to the report. A derivative is a financial contract whose value is derived from the performance of assets, interest rates, currency exchange rates or indices.

Dorsey L. Baskin, national technical director for financial institutions at Arthur Andersen in Washington, D.C., and member of the American Institute of CPAs banking and savings institutions committee, said his risk management consulting practice continued to see a lot of interest. "We have customers who want new risk management tools, such as software, or need to restructure their organizations to integrate better risk management," said Baskin.

The OCC report attributed the decline to a reduction in interest rates and other market volatilities, as well as banks' continued use of bilateral netting--an arrangement between a bank and another entity that creates a single legal obligation for all individual contracts. "This report reflects continued improvements either in risk management tools or market conditions or both," said Baskin.

The number of banks holding derivatives declined by 37 in the fourth quarter to 558 banks. However, the top nine banks holding derivatives account for 94% of all U. …

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