WASHINGTON — U.S. commercial banks reported a $9.2 billion trading loss for the fourth 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. For 2008, banks reported an annual trading loss of $836 million, compared to trading revenues of $5.5 billion in 2007.

“While banks reported reasonably strong client demand and wide intermediation spreads in the fourth quarter, large write-downs on legacy credit positions continued to take a toll on trading results,” Deputy Comptroller for Credit and Market Risk Kathryn E. Dick said. “Trading results continue to reflect large changes in the fair values of derivatives receivables and payables, based upon market participants’ views of the credit quality of both banks and their counterparties.”

Ms. Dick noted that trading results suffered from an unfavorable combination of higher overall corporate credit spreads and lower bank credit spreads, each of which result in trading losses.

The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased by $25 trillion (14 percent) in the fourth quarter to $200 trillion. The increase resulted from the migration of investment bank derivatives activity into the commercial banking system. Interest rate contracts increased $27 trillion to $164 trillion, while credit derivatives fell 2 percent to $16 trillion.

The OCC also reported that net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, increased $364 billion, or 84 percent, during the quarter to $800 billion. “The sharp decline in interest rates continues to increase derivative exposures, both payables and receivables,” Ms. Dick said.

She also noted that, similar to the notional derivatives increase, migration of derivatives activity from investment banks into the commercial banking system accelerated the growth in credit exposure.

The report also noted that:

• 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.
• Credit default swaps are the dominant product in the credit derivatives market, representing 98 percent of total credit derivatives.
• The number of commercial banks holding derivatives increased by 33 in the quarter to 1,010.