U.S. Treasury Secretary Timothy F. Geithner urged European leaders and finance ministers to increase the firepower of their 440 billion-euro rescue fund. The Obama administration's stance might have been prompted by worries that defaults in the euro zone would hurt U.S. banks through their CDS exposure, according to Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California-based bank-rating firm.

'Risk-Creation'

"Geithner keeps asking Europeans to fix their shop, but he doesn't do anything to rein in the risk-creation at home through these derivatives," Whalen said.

Leaders of the 17 euro-zone countries decided last week to more than double the size of their rescue fund to 1 trillion euros. They haven't yet said how it will be financed.

Geithner and Federal Reserve Chairman Ben S. Bernanke have said they're not worried about U.S. banks' exposure to European sovereign debt. Regulators, including the Fed, are monitoring CDS risk, according to one official who declined to be named because he wasn't authorized to discuss the matter. U.S. banks have collected sufficient collateral from counterparties on the CDS and should be able to manage defaults, the official said.

JPMorgan CEO Jamie Dimon, 55, said last month that the New York-based bank hedges its exposure to European sovereign debt through contracts with lenders in other countries, including Germany and France. The counterparties are diversified, and JPMorgan takes sufficient collateral to protect itself against losses, Dimon said during a third-quarter earnings call.

MF Global

MF Global Holdings Ltd., a broker-dealer run by former Goldman Sachs co-Chairman Jon Corzine, reported $1 billion of net exposure to Spain and $3 billion to Italy in its second- quarter financials, explaining in a footnote that the net was partly due to a short position on French bonds. Those hedges weren't enough to protect MF Global, which filed for bankruptcy yesterday after losses in the portfolio wiped out its capital.

Hedging and other ways of netting help banks report lower exposures than the full risk they might face. Morgan Stanley said last month that its net exposure in the third quarter to the debt of Spain's government, banks and companies was $499 million. The Federal Financial Institutions Examination Council, an interagency body that collects data for U.S. bank regulators and disallows some of the netting, said the New York-based firm's exposure in Spain was $25 billion in the second quarter.

The net figure for Italy was $1.8 billion, Morgan Stanley said, compared with $11 billion reported by the federal data- collection body.