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News Release 2015-49
April 1, 2015
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WASHINGTON — Insured U.S. commercial banks and savings institutions reported trading revenue of $4.4 billion in the fourth quarter of 2014, down $1.3 billion, or 22 percent, from $5.7 billion in the third quarter, the Office of the Comptroller of the Currency (OCC) reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.
"The year finished on a weak note, which is true almost every year,” said Kurt Wilhelm, Director of the Financial Markets Group. Trading revenue was, however, 52 percent higher than $2.9 billion in the fourth quarter of 2013.
Mr. Wilhelm noted that trading revenue has fallen in the fourth quarter every year since 2000, with the exception of 2004. “The dealing firms and their clients generally reduce their risk appetite at the end of the year. As the calendar runs out, market participants don’t want to take risks that could create losses that jeopardize income forecasts.” He also noted that fair value credit adjustments had a larger, and more negative, impact than had been the case in recent quarters. “Given the headwinds from credit valuation adjustments, and normal seasonal weakness, trading performance in the fourth quarter was actually fairly strong.” Mr. Wilhelm indicated that trading revenue in the fourth quarter was 22 percent higher than the $3.6 billion average of the five fourth quarters since the end of the financial crisis.
For all of 2014, trading revenue totaled $22.7 billion, $0.6 billion higher (3 percent) than $22.1 billion in 2013. “The modest increase in trading revenue during 2014 was due to better results from trading equity and commodity products, as interest rates and foreign exchange (FX) income, which drive bank trading revenue, didn’t really change much,” said Mr. Wilhelm. Combined interest rate and FX trading revenue of $16.6 billion in 2014 was only $0.1 billion higher than in 2013.
Credit exposures from derivatives increased in the fourth quarter. Net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, rose $47 billion, or 12 percent, to $445 billion. “Derivatives credit exposures are very sensitive to interest rates, because rate contracts are about 80 percent of total derivatives contracts,” said Mr. Wilhelm. “At the end of the year, we saw interest rates in the U.S. fall fairly sharply, in sympathy with even larger declines in foreign interest rates, as markets priced in lower inflation and growth expectations.”
The report shows that the notional amount of derivatives held by insured U.S. commercial banks declined $19.0 trillion, or 8 percent, from the third quarter to $220 trillion. “Trade compression, particularly of interest rate contracts, continues to reduce the volume of notional derivatives outstanding,” said Mr. Wilhelm. Trade compression involves aggregating a large number of trades with similar factors, such as risk or cash flow, into fewer trades, thereby reducing capital requirements and operational risk.
The OCC also reported:
A copy of the OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Fourth Quarter 2014 is available on the OCC’s Website.
William Grassano (202) 649-6870