OCC Reports First Quarter Bank Trading Revenue of $1.13 Billion

WASHINGTON — Insured U.S. commercial banks reported $1.13 billion in revenues from trading cash and derivative instruments in the first quarter, compared to a loss of $9.97 billion in the fourth quarter of 2007. Revenues for the quarter are 84 percent lower than the first quarter of 2007 due to ongoing turmoil in the financial markets, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

"While revenues improved over the previous quarter, the current market volatility and liquidity concerns continue to negatively affect trading performance" said Deputy Comptroller for Credit and Market Risk Kathryn E. Dick. "Seasonally, the first quarter is typically one of the strongest but this did not materialize due to continued writedowns of sub-prime CDO exposures."

Commercial banks reported trading losses of $3.9 billion in credit-related instruments in the first quarter, compared to losses of $11.8 billion in the fourth quarter. Revenues from interest rate contracts were $2.8 billion, compared to a loss of $357 million in the fourth quarter. Revenues from foreign exchange transactions increased 11 percent to $2.0 billion.

The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased by $14.7 trillion or 9 percent in the first quarter to $180.3 trillion. The first quarter increase follows an unusual decline in notionals during the fourth quarter of 2007.

Total interest rate contracts increased $12.3 trillion in the first quarter. Credit derivatives increased 4 percent during the quarter to a notional level of $16.4 trillion, 61 percent higher than a year ago.

The OCC also reported that the net current credit exposure, the primary metric the OCC uses to measure credit risk in derivatives activities, increased $156 billion, or 50 percent, during the quarter to $465 billion.

"Continued declines in interest rates coupled with widening credit spreads resulted in a significant increase in counterparty credit risk during the quarter. The increase in this measure is nearly equivalent to the total amount reported in the first quarter of 2007," said Ms. Dick.

• 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 increased by 48 in the quarter to 1,003.

A copy of the OCC’s Quarterly Report on Bank Trading and Derivatives Activities: First Quarter 2008 is available on the OCC’s Website at: https://www.occ.gov/news-issuances/news-releases/2008/nr-occ-2008-74a.pdf.