WASHINGTON –
Derivatives held by U.S. commercial banks increased by $5.1 trillion in the
second quarter of 2005, to $96.2 trillion, the Office of the Comptroller of the
Currency reported today in its
quarterly Bank Derivatives Report.
Kathryn Dick, Deputy
Comptroller for Risk Evaluation, said that while the 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 creditworthiness of
the counterparties in the transactions, she said.
The OCC also reported
that credit derivatives increased by $981 billion, to $4.1 trillion.
“Low worldwide interest
rates and credit spreads have let to strong client demand for credit
instruments, and the growth in notional volumes reflects that,” said Ms.
Dick. “Our large dealer banks have
targeted credit derivatives as an important segment of their product mix and a
critical aspect of our supervision is to work with other agencies to ensure
that the dealer community has the appropriate operational infrastructure to
support this growing market.”
The report noted that
one measure of credit risk in dealer portfolios--current credit exposure, net
of legally enforceable netting agreements-- increased by $2 billion to $200
billion at the end of the second quarter.
The current credit exposure is the amount owed to banks if all contracts
were immediately liquidated.
“The decline in
interest rates caused the fair values of contracts to increase very sharply,
but an equally large increase in netting benefits kept our benchmark credit
risk indicator relatively flat,” said Ms. Dick.
The OCC found that
gross positive fair values increased 23%, or $282 billion, to $1.495 trillion,
while netting benefits increased 28%, or $280 billion, to $1.295 trillion.
“While these numbers
are obviously very large, it is important to note that banks take collateral to
reduce their exposures, and moreover the average quality of counterparties in
the derivatives portfolio is higher than in the C&I portfolio,” Ms. Dick
explained.
The OCC also reported
that revenues attributed to trading of cash instruments and derivative
activities decreased by $2.5 billion in the second quarter to $1.96
billion. “We did not expect to see a
repeat of the record amount of trading revenues from the first quarter,
especially in light of second quarter market dislocations,” said Ms. Dick.
The OCC second quarter
derivatives report also noted:
Revenues from foreign
exchange positions decreased by $398 million to $1.3 billion. Revenues from equity trading positions
decreased by $756 million to $131 million.
Revenues from interest rate positions decreased by $1.3 billion to $362
million.
The 25 largest banks
account for more than 99 percent of the total notional amount of
derivatives. Five commercial banks
account for 96 percent of the total.
The number of
commercial banks holding derivatives increased by 74 to 769 banks.
A copy of the OCC Bank
Derivatives Report: Second Quarter 2005 is available on the OCC Web site: www.occ.treas.gov.
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.