OCC Reports Derivatives Volume Continues to Increase

WASHINGTON – Derivatives held by U.S. commercial banks increased by $3.7 trillion in the fourth quarter of 2004, to $87.9 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 $941 million in the three month period, to $2.2 billion.

“Growth in over-the-counter derivatives was supported by continued strong corporate demand for risk management products,” said Kathryn Dick, Deputy Comptroller for Risk Evaluation. “I expect the strong corporate demand for risk management products to continue.”

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 commercial banking system,” said Ms. Dick. “These banks have resident OCC examiners on site to evaluate risks in the derivatives portfolio on an ongoing basis.”

The OCC fourth quarter derivatives report also noted that:

Revenues from foreign exchange positions increased by $820 million, to $2 billion. Revenues from equity trading positions increased by $89 million, to $574 million. Revenues from interest rate positions decreased by $58 million, to a loss of $472 million.

The twenty-five largest banks account for more than 99 percent of the total notional amount of derivatives.

The notional amount of short-term contracts (those with maturities of less than one year) increased by $234 billion to $21.6 trillion. Contracts with remaining maturities of one to five years grew by $1.7 trillion to $28.1 trillion. Long term contracts (those with maturities of five or more years) increased by $1.3 billion, to $17.4 trillion.

The number of commercial banks holding derivatives increased by 10 to 677 banks.

A copy of the OCC Bank Derivatives Report: Fourth Quarter 2004 is available on the OCC Website: www.occ.gov.

Related Links

• Quarterly Derivatives Report