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News Release 2015-129 | September 21, 2015

OCC Reports Second Quarter Bank Trading Revenue of $5.5 Billion

WASHINGTON—Insured U.S. commercial banks and savings institutions reported trading revenue of $5.5 billion in the second quarter of 2015, $2.2 billion lower (28 percent) than in the first quarter, the Office of the Comptroller of the Currency (OCC) reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities. Trading revenue in the second quarter was $0.9 billion lower (14 percent) than in the second quarter of 2014.

"The expected seasonal decline in trading revenue showed up on schedule in the second quarter," said Kurt Wilhelm, Director of the Financial Markets Group. "The fall in second quarter trading revenue was a little more than the average 25 percent decline we've seen in second quarters since 2009, as there is still pressure on revenue from interest rate and foreign exchange products." When assessing bank trading performance on an historical basis, Mr. Wilhelm noted that 2009 is an appropriate starting point. "That's when investment banks took banking charters or were acquired by bank holding companies. The set of large trading banks changed quite significantly at that point."

Trading revenue from interest rate and foreign exchange (FX) products, the driver of bank trading revenue, was $4.3 billion in the second quarter, $0.2 billion lower (4 percent) than the average for second quarters since 2009. "As long as we fail to see growth in revenue from rates and FX, trading results will struggle to keep pace with what we've seen in the past." Mr. Wilhelm emphasized the seasonal aspect of bank trading revenue, as "only once since 2009 has trading revenue increased in the second quarter."

For the first six months of 2015, trading revenue totaled $13.2 billion, $0.6 billion higher (5 percent) than in 2014. "The favorable comparison in 2015 is more a reflection of relative weakness in 2014 rather than strength this year," said Mr. Wilhelm.

Credit exposures from derivatives fell sharply in the second quarter. Net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, fell $97 billion, or 19 percent, to $406 billion. "The back-up in longer-term interest rates in the second quarter took some of the pressure off of receivables from rate contracts, which represent the lion's share of derivatives receivables. But, additionally, FX receivables had one of the largest declines we've ever seen," said Mr. Wilhelm. After rising sharply in the first quarter, Mr. Wilhelm noted that the U.S. dollar weakened in the second quarter, translating into a sharp decline in receivables.

The report shows that the notional amount of derivatives held by insured U.S. commercial banks declined $5 trillion, or 3 percent, during the second quarter to $198 trillion. "While trade compression continues to reduce notionals, this quarter it was a decline in forward contracts, rather than swaps, that caused notionals to fall," said Mr. Wilhelm. "Swap contracts had declined by a cumulative $31 trillion in the fourth quarter of 2014 and the first quarter of 2015. This quarter, however, they were virtually unchanged. Forward contracts, on the other hand, fell by nearly $5 trillion, explaining the entire notional decline."

The OCC also reported:

  • For the first time since 2007, recoveries of previously charged-off derivatives exposures exceeded charge-offs in the second quarter. Banks reported net recoveries of $10 million, compared to net charge-offs of $70 million in the first quarter. A record eight banks reported net recoveries.
  • Banks hold collateral to cover 85 percent of their NCCE, up from 79 percent in the first quarter. The quality of the collateral is very high, as 75 percent is cash (U.S. dollar and non-dollar).
  • Trading risk exposure, as measured by average value-at-risk (VaR), moved lower in the second quarter. Four of the five largest dealer banks reported declines in VaR during the second quarter.
  • Receivables from interest rate contracts fell $796 billion, or 26 percent, to $2.2 trillion, reflecting rising interest rates in the second quarter. Receivables from FX contracts fell $202 billion, or 28 percent, to $525 billion.
  • Derivative contracts are concentrated in a small number of institutions. The largest four banks hold 91 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 78 percent of total derivative notional values, the same as in the first quarter. Swap products represent 59 percent of total derivatives notionals, up from 58 percent in the first quarter.
  • The percentage of centrally cleared derivatives transactions fell to 35 percent in the second quarter, from 36 percent in the first quarter. Clearing has developed most in interest rate derivatives, where 43 percent are cleared, and in credit derivative products. In credit, clearing is more common for investment-grade reference entities, where 21 percent are cleared, compared to 16 percent for non-investment-grade names.
  • Credit default swaps are the dominant product in the credit derivatives market, representing 95 percent of total credit derivatives by notional value.
  • The number of commercial banks and savings associations holding derivatives was 1,421 in the second quarter, down from 1,430 in the first quarter.

A copy of the OCC's Quarterly Report on Bank Trading and Derivatives Activities: Second Quarter 2015 is available on the OCC's website.

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