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News Release 2011-149 | December 16, 2011

OCC Reports Third Quarter Trading Revenue of $13.1 Billion

WASHINGTON—Commercial banks reported trading revenue of $13.1 billion in the third quarter of 2011, 78 percent higher than the $7.4 billion in the second quarter, and 214 percent higher than in the third quarter of 2010, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

"The headline revenue numbers are misleading," said Martin Pfinsgraff, Deputy Comptroller for Credit and Market Risk. "It was technically a record quarter for trading revenues, but an unusually large contribution from hedging gains on mortgage servicing assets combined with revenues from increases in banks’ own credit spreads distorted results." Mr. Pfinsgraff noted that gains or losses from hedges of mortgage servicing assets (MSAs) and changes in the value of derivatives liabilities are not part of core trading operations. "The gains from MSA hedges simply offset MSA losses reported elsewhere in the income statement, and we don’t consider income from increases in the banks’ own credit spreads to be real revenues. Adjusting for these reporting anomalies, revenues in the third quarter were lower by about $8 billion from the reported numbers. The uncertainty associated with the European credit crisis and slowing global growth caused a more noticeable decline in client activity than usually occurs," said Mr. Pfinsgraff. "Given the environment, both banks and their clients were less willing to take risk."

The OCC reported that net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, increased $141 billion, or 39 percent, to $504 billion during the third quarter. Mr. Pfinsgraff noted that "the concerns about European credit quality led to a sharp decline in market interest rates. That caused not only the large MSA hedge gains, but it also pushed credit exposures materially higher." Mr. Pfinsgraff also noted that the NCCE figure in the third quarter was the fourth highest credit exposure number on record, trailing only the fourth quarter of 2008 and the first two quarters of 2009, at the height of the financial crisis. "These credit exposure numbers are very large, but it is important to understand that 64 percent of the exposure is collateralized." Mr. Pfinsgraff added that the coverage of NCCE was down from 71 percent in the second quarter, due to counterparties managing their collateral more aggressively, and removing collateral in excess of contractual requirements. The report shows that the notional amount of derivatives held by insured U.S. commercial banks fell by $1.4 trillion (0.6 percent) from the second quarter to $248 trillion. Interest rate contracts decreased $2.5 trillion (one percent) to $202 trillion, while FX contracts increased one percent to $26.8 trillion.

The report also noted that:

  • Banks hold collateral to cover 64 percent of their NCCE. The quality of the collateral is very high, as 78 percent is cash (U.S. dollar and non-dollar).
  • Trading risk exposure, as measured by value-at-risk (VaR), fell 6.1 percent during the third quarter at the five largest trading companies, and is down 8.8 percent from the third quarter of 2010.
  • Derivatives contracts are concentrated in a small number of institutions. The largest five banks hold 96 percent of the total notional amount of derivatives, while the largest 25 banks hold nearly 100 percent.
  • Derivative contracts remain concentrated in interest rate products, which represent 82 percent of total derivative notional values.
  • Credit default swaps are the dominant product in the credit derivatives market, representing 97 percent of total credit derivatives.
  • The number of commercial banks holding derivatives increased by 17 in the quarter to 1,088.

A copy of the OCC's Quarterly Report on Bank Trading and Derivatives Activities: Third Quarter 2011 is available on the OCC's website.

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