OCC Reports Decline in Derivatives Credit Exposures

WASHINGTON — Credit risk in bank trading activities continued to decline in the third quarter of 2009, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

The OCC reported that net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, decreased $70 billion, or 13 percent, to $484 billion. “As financial markets have stabilized, credit spreads have narrowed considerably, and that has helped to reduce counterparty credit exposures,” said Kathryn Dick, Deputy Comptroller for Credit and Market Risk. Ms. Dick noted that, in 2008, crisis-related declines in interest rates and widening of credit spreads had caused the NCCE to reach $800 billion in the fourth quarter of 2008. “Current credit exposures are now 40 percent lower than at the peak of the crisis,” said Ms. Dick.

U.S. commercial banks reported trading revenues of $5.7 billion in the third quarter of 2009, compared to $5.2 billion in the second quarter, “The return to more normal financial market conditions has allowed banks to generate more consistent trading revenues this year,” said Ms. Dick. She noted that the business of providing risk management services to help clients manage risks remains an important part of a bank’s product set.

The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased by $804 billion (or 0.4 percent) in the third quarter to $204.3 trillion. Interest rate contracts increased $700 billion to $173 trillion, while credit derivatives fell 3 percent to $13 trillion.

The report also noted that:

• Banks hold collateral to cover 64 percent of their NCCE. The quality of the collateral is very high, as 82 percent is cash (U.S. dollar and non-dollar).
• 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 98 percent of total credit derivatives.
• The number of commercial banks holding derivatives decreased by 45 in the quarter to 1,065.

Related Links

• OCC’s Quarterly Report on Bank Trading and Derivatives Activities: Third Quarter 2009