WASHINGTON
– Derivatives held by U.S. commercial banks increased by $2.6 trillion in the
third quarter of 2005, to $98.8 trillion, the Office of the Comptroller of the
Currency reported today in its
quarterly Bank Derivatives Report.
The
OCC also reported that earnings attributed to trading of cash instruments and
derivative activities increased by $2.9 billion in the three-month period, to
$4.85 billion, a new record. The top
five banks accounted for 84 percent of total trading revenue, compared to 79
percent in the second quarter of 2005.
“The
revenue performance in the third quarter was obviously very strong, a quarterly
record, and reflected a combination of favorable events,” said Kathryn E. Dick,
the OCC’s Deputy Comptroller for Risk Evaluation. “Robust client demand, a
recovery of some of the losses from under-performing second quarter
transactions in credit products, and effective strategic positioning all
underpinned revenues,” noted Ms. Dick.
Ms.
Dick noted that while the record notional amount of derivatives is a reasonable
reflection of business activity, it does not represent the amount at risk for
commercial banks. The risk in a
derivatives contract is a function of a number of variables, such as, whether
counterparties exchange notional principal, the volatility of the currencies or
interest rates used as the basis for determining contract payments, the
maturity and liquidity of contracts, and the credit worthiness of the
counterparties in the transactions, she said.
“Holdings
of derivatives continue to be concentrated in the largest banks with five
commercial banks accounting for 96 percent of the total notional amount of
derivatives in the U.S. commercial banking system,” said Ms. Dick. “These banks have resident OCC examiners on
site to evaluate the credit, price, operational, reputation and compliance
risks in the derivatives portfolio on an ongoing basis.”
Net
current credit exposure, the metric most representative of derivatives credit
risk, increased 6 percent to $212 billion.
Total credit exposure, the sum of netted current credit exposure and
potential future exposure, increased 9 percent to $1.06 trillion. Potential future exposure (PFE) increased 10
percent to $845 billion. “The strong
growth of credit derivatives is really having a pronounced impact on our PFE
numbers,” said Ms. Dick.
The
OCC third quarter derivatives report also noted that:
·
Revenues
from foreign exchange positions increased by $153 million, to $1.45
billion. Revenues from equity trading
positions increased by $1.11 billion, to $1.24 billion. Revenues from interest rate positions
increased by $1.3 billion, to $1.66 billion.
Revenues from commodity and other positions increased by $341 million, to $507
million.
·
The
25 largest banks account for more than 99 percent of the total notional amount
of derivatives.
·
The
notional amount of short-term contracts (those with maturities of less than one
year) decreased by 1.5 percent, medium-term contracts (maturities of one to
five years) increased by 4.5 percent and long-term contracts (over five years)
increased by 4.9 percent.
·
The
number of commercial banks holding derivatives increased by 36 to 805 banks.
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The Office of the
Comptroller of the Currency was created by Congress to charter national banks,
to oversee a nationwide system of banking institutions, and to assure that
national banks are safe and sound, competitive and profitable, and capable of
serving in the best possible manner the banking needs of their customers.