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News Release 2012-131
September 21, 2012
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WASHINGTON — Commercial banks and savings associations reported trading revenue of $2.0 billion in the second quarter of 2012, 69 percent lower than the first quarter of 2012, and 73 percent lower than in the second quarter of 2011, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.
“Trading revenues were weak in the second quarter,” said Martin Pfinsgraff, Deputy Comptroller for Credit and Market Risk. “While both normal seasonal weakness and reduced client demand played a role, it was clearly the highly-publicized losses at JPMorgan Chase that caused the sharp drop in trading revenues.” Mr. Pfinsgraff noted that JPMorgan Chase reported a $3.7 billion loss from credit trading activities, causing the bank to report an aggregate $420 million trading loss for the quarter.
The OCC reported that net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, increased $32 billion, or nine percent, to $410 billion in the second quarter. “Since interest rate contracts are 80 percent of total notionals, credit exposure on derivatives is sensitive to interest rate moves, and the continued decline in interest rates drove the credit exposure numbers higher again in the second quarter,” said Mr. Pfinsgraff. “But, it is important to note that NCCE is much lower than the $800 billion peak it reached at the end of 2008, even though rates are much lower now.” Mr. Pfinsgraff explained that the extended period of low interest rates, and the growth in derivatives that have occurred during this time, has narrowed the difference between prevailing swap rates in dealers’ interest rate books and current market rates. “The credit exposure is a function of this difference, and it has narrowed over time.” Mr. Pfinsgraff also noted that 70 percent of the NCCE was collateralized, up from 67 percent in the prior quarter.
The report shows that the notional amount of derivatives held by insured U.S. commercial banks decreased by $5.5 trillion, the fourth consecutive quarterly decline. Notionals fell 2.4 percent to $222 trillion. Interest rate contracts decreased $5 trillion (three percent) to $179 trillion, while credit contracts decreased three percent to $13.6 trillion. Declines in notionals are being driven by compression efforts by banks seeking to reduce regulatory capital requirements, as well as operating and risk burdens in their derivatives portfolios.
The report also noted that:
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