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News Release 2005-125
December 21, 2005
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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:
A copy of the OCC Bank Derivatives Report: Third Quarter 2005 is available on the OCC Website: www.occ.gov/news-issuances/news-releases/2005/nr-occ-2005-125a.pdf.
Kevin Mukri (202) 874-5770