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News Release 2011-27 | March 17, 2011

OCC Reports Fourth Quarter Trading Revenue of $3.5 Billion

WASHINGTON—Commercial banks reported trading revenue of $3.5 billion in the fourth quarter of 2010, 80 percent higher than the fourth quarter of 2009 and 17 percent lower than the third quarter of 2010, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities. For the full year of 2010, trading revenues totaled $22.5 billion, nearly matching the record $22.6 billion in 2009.

"We expected to see trading revenues fall in the fourth quarter, given the well known seasonal pattern that exists in trading results," Deputy Comptroller for Credit and Market Risk Martin Pfinsgraff said. Mr. Pfinsgraff noted that trading revenues in the fourth quarter have been the weakest of any quarter in the year nine times since 2000.

"Although trading revenues fell in the fourth quarter, it's important to recognize that they were the second highest of any fourth quarter on record," Mr. Pfinsgraff said. "Moreover, trading revenues for the year were very strong, only slightly below the record revenues in 2009."

Mr. Pfinsgraff added that the strong trading performance for the year occurred despite substantial reductions in risk, as measured by value-at-risk (VaR). "While some of the decline in trading VaR is due to lower volatility in financial markets, it's also very clear that banks have reduced risk in their trading operations," he said. Average VaR for the five largest banking companies fell 24 percent during 2010.

The OCC reported that net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, declined $65 billion, or 15 percent, to $375 billion this quarter. NCCE has fallen 53 percent from its peak of $800 billion at the height of the credit crisis.

"We were especially pleased to see that the number of banks reporting charged-off derivatives exposures fell sharply last quarter," Mr. Pfinsgraff said. He noted that 23 banks, the largest total ever, reported charge-offs in the third quarter for a total of $284 million. In the fourth quarter, 15 banks reported charge-offs totaling $111 million. "All of the credit metrics for derivatives are heading in the right direction: net current credit exposure is down, as are charge-offs and delinquencies," he said. Past due derivatives contracts fell 65 percent to $54 million.

The report shows that the notional amount of derivatives held by insured U.S. commercial banks decreased by $3.5 trillion (or 1.5 percent) in the fourth quarter to $231 trillion. Interest rate contracts declined $3 trillion (2 percent) to $193.5 trillion, while FX contracts increased 1 percent to $21 trillion.

The report also noted that:

  • Banks hold collateral to cover 72 percent of their NCCE. The quality of the collateral is very high, as 81 percent is cash (US dollar and non-dollar).
  • 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 97 percent of total credit derivatives.
  • The number of commercial banks holding derivatives declined by 35 in the quarter to 1,070.

A copy of the OCC's Quarterly Report on Bank Trading and Derivatives Activities: Fourth Quarter 2010 is available on the OCC's website.

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