OCC Reports Third Quarter Bank Trading Revenue of $6.0 Billion

WASHINGTON — Insured U.S. commercial banks reported $6.0 billion in revenues from trading cash and derivative instruments in the third quarter, compared to revenues of $1.6 billion in the second quarter of 2008, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

"Banks generally reported strong client demand and, given poor market liquidity, wider intermediation spreads," said Deputy Comptroller for Credit and Market Risk Kathryn E. Dick. "However, most of the increase in trading revenue is due to the deterioration in credit spreads during the third quarter and the subsequent decline in the value of trading liabilities for most banks. Since credit spreads have tightened substantially in the fourth quarter, we can expect to see more trading revenue volatility when fourth quarter numbers are released."

The report shows that the notional amount of derivatives held by insured U.S. commercial banks decreased by $6.3 trillion in the third quarter, or 3 percent, to $176 trillion. Interest rate contracts decreased $7.7 trillion to $137 trillion due to acquisition-related elimination of contracts. Although market participants continue to use methods such as trade compression to reduce economically offsetting credit derivatives trades, credit derivative contracts increased 4 percent, to $16 trillion. Ms. Dick noted that "the uncertain credit environment created demand for credit hedges, particularly for counterparty credit risks."

The OCC also reported that net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, increased $30 billion, or 7 percent, during the quarter to $435 billion. Banks charged-off $92 million in derivatives receivables during the quarter, or 0.02 percent of the net current credit exposure, down from $120 million in the second quarter.

The report also noted that:

• 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 nearly 100 percent.
• Credit default swaps are the dominant product in the credit derivatives market, representing 99 percent of total credit derivatives.
• The number of commercial banks holding derivatives increased by 2 in the quarter to 977.

A copy of the OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Third Quarter 2008 is available on the OCC’s Website at: https://www.occ.gov/news-issuances/news-releases/2008/nr-occ-2008-152a.pdf.