September 21, 2012
OCC Reports Second Quarter Trading Revenue of $2.0 Billion
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:
- Banks hold collateral to cover 70 percent of their NCCE. The quality of the collateral is very high, as 79 percent is cash (U.S. dollar and non-dollar).
- Trading risk exposure, as measured by value-at-risk (VaR), increased one percent in the second quarter from the first quarter at the five largest trading companies.
- Derivatives contracts are concentrated in a small number of institutions. The largest four banks hold 93 percent of the total notional amount of derivatives, while the largest 25 banks hold nearly 100 percent.
- Derivative contracts remain concentrated in interest rate products, which represent 80 percent of total derivative notional values.
- Credit default swaps are the dominant product in the credit derivatives market, representing 97 percent of total credit derivatives.
- The number of commercial banks and savings associations holding derivatives increased by 41 in the quarter to 1,332.