OCC Reports Second Quarter Bank Trading Revenue of $1.6 Billion

WASHINGTON — Insured U.S. commercial banks reported $1.6 billion in revenues from trading cash and derivative instruments in the second quarter, compared to revenues of $721 million in the first quarter of 2008, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

"The trading environment remains challenging and while revenues improved in the second quarter of 2008, overall performance remains weak due to the continued write-down of credit exposures in the trading portfolios," said Deputy Comptroller for Credit and Market Risk Kathryn E. Dick. "Our large national trading banks report solid client demand for risk management products in the two biggest derivatives portfolios in the commercial banking system - interest rates and foreign exchange, but liquidity issues in markets for traded credit continue to depress client business in this area," said Ms. Dick. Revenues from interest rate contracts were $1.4 billion for the quarter, revenues from foreign exchange contracts were $2.1 billion, revenues from commodities and equity were $.8 billion and losses from trading credit instruments were $2.7 billion.

The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased by $1.8 trillion in the second quarter, or 1 percent, to $182 trillion. Interest rate contracts increased $3.1 trillion to $145 trillion, while credit derivatives decreased 6 percent to $15.5 trillion.

The OCC also reported that net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $59 billion, or 13 percent, during the quarter to $406 billion. "Although the rise in interest rates caused a decline in the reported current credit exposures this quarter, counterparty risk remains one of our top areas of focus and we continue to work closely with other supervisors and the industry to seek stronger risk management in this area," said Ms. Dick.

The report also noted that:

• 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.
• Credit default swaps are the dominant product in the credit derivatives market, representing 99 percent of total credit derivatives.
• The number of commercial banks holding derivatives decreased by 28 in the quarter to 975.

A copy of the OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Second Quarter 2008 is available on the OCC’s Website at: https://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq208.pdf.