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News Release 2006-137 | December 15, 2006

OCC Reports Bank Quarterly Trading Revenues of $4.5 Billion

WASHINGTON —Insured U.S. commercial banks generated revenues of $4.5 billion from trading cash instruments and derivative products in the third quarter of 2006, the Office of the Comptroller of the Currency reported today in its Quarterly Report on Bank Derivatives Activities. For comparison purposes, banks reported $4.7 billion from trading activities in the second quarter of 2006 and $4.9 billion in the third quarter of 2005.

"While trading revenues declined modestly in the third quarter, we consider them to be quite strong considering the weakness in interest rate and foreign exchange revenues," Deputy Comptroller for Credit and Market Risk Kathryn E. Dick said. "Revenues from equity and commodity activities each set records, and that helped to soften the impact of much weaker interest rate and foreign exchange revenues, each of which was adversely affected by a low volatility environment that caused weak client demand."

The report noted that the notional amount of derivatives held by insured U.S. commercial banks increased $7 trillion to a record $126 trillion in the third quarter, 6 percent higher than in the second quarter and 28 percent more than the third quarter in 2005. Consistent with previous quarters, bank derivatives activity remained concentrated in interest rate contracts, which represented 82 percent of total notionals. 

Credit derivatives grew 20 percent to $7.9 trillion while equity derivatives increased 17 percent to $2.2 trillion in the third quarter according to the OCC report.

"We continue to see very strong growth in credit derivatives, as well as progress in reducing outstanding confirmations and improvement in overall infrastructure," she said. "We are also pleased to see similar efforts now directed to equity derivatives."

The net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, fell 12 percent to $176 billion, the OCC reported. "It’s important to keep the credit exposure numbers in perspective," Ms. Dick said. "Derivatives credit exposures are simply another line of business in banks’ credit portfolios."

"These exposures generally involve higher quality counterparties and collateral than are found in the traditional commercial and industrial loan portfolio," she said. "While not all derivatives exposures are collateralized, those that are typically are secured by cash or government securities collateral."

These factors explain why charge-offs on derivatives exposures tend to be very low, Ms. Dick said.

The report also noted that:

Foreign exchange trading revenues decreased 49 percent to $1.4 billion. Interest rate revenues decreased 67 percent to $552 million. Equity revenues rose 1,676 percent to $1.8 billion, and commodity/other revenues rose 188 percent to $789 million.

Derivatives contracts are concentrated in a small number of institutions. The largest five banks hold 97 percent of the total notional amount of derivatives, while the largest 25 banks hold 99 percent.

The number of commercial banks holding derivatives increased by 11 in the third quarter to 913.

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