OCC Reports Record Bank Trading Revenues of $18.8 Billion for 2006

WASHINGTON — Insured U.S. commercial banks posted a record $18.8 billion in trading revenues in 2006, up 31 percent from the previous annual record of $14.4 billion set in 2005, the Office of the Comptroller of the Currency reported today in the OCC Quarterly Report on Bank Derivatives Activities. In the fourth quarter, commercial banks generated revenues of $3.9 billion from trading cash instruments and derivative products, off slightly from the $4.5 billion in trading revenues for the third quarter of 2006.

"Bank trading revenues have been strong the past few years due in large part to robust client demand, especially from large institutional investors such as hedge funds," said Deputy Comptroller for Credit and Market Risk Kathryn E. Dick.

The OCC also reported that the notional amount of derivatives held by insured U.S. commercial banks increased $5.3 trillion, or 4 percent, to a record $131 trillion in the fourth quarter, 30 percent higher than year-end 2005.

The report noted that a fast-growing area has been credit derivatives, which increased to $9.0 trillion at year-end 2006, representing a 55 percent increase from the $5.8 trillion reported at year-end 2005.

"The continued strong growth of credit derivatives reflects their importance as a source of managing and dispersing risk and we do not foresee any decline in the significance of this class of derivatives in future time periods," Ms. Dick said.

The OCC reported that the net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, increased a modest $9 billion, or 5 percent, to $185 billion.

"We spend a lot of time supervising these credit exposures, because they are large and systemically important," Ms. Dick said. "That said, we recognize that a meaningful portion of this exposure is secured by cash and government securities, and that is one reason why charge-offs on derivatives exposures remain so low."

The report also noted that:

Foreign exchange trading revenues increased 19 percent in the fourth quarter to $1.6 billion. Interest rate revenues increased 109 percent to $1.2 billion. Equity revenues decreased 34 percent to $1.2 billion, and commodity/other revenues decreased 114 percent to a loss of $111 million in the fourth quarter.

Derivatives contracts are concentrated in a small number of institutions. The largest five banks hold 97 percent of the total notional amount of derivatives, while the largest 25 banks hold nearly 100 percent.

The number of commercial banks holding derivatives increased by nine in the fourth quarter to 922.

A copy of the OCC's Quarterly Report on Bank Derivatives Activities: Fourth Quarter 2006 is available on the OCC's Website at: https://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq406.pdf.

Related Link

• Quarterly Report on Bank Derivatives Activities: Fourth Quarter 2006