OCC Reports Strong First Quarter Trading Revenues and Declining Derivatives Credit Exposure

WASHINGTON — Bank trading revenues in the first quarter rebounded from seasonally lower fourth quarter levels, and credit exposure from derivatives continued to decline, the Office of the Comptroller of the Currency reported today in the OCC's Quarterly Report on Bank Trading and Derivatives Activities.

U.S. commercial banks reported trading revenues of $8.3 billion in the first quarter of 2010, substantially higher than in 2009’s fourth quarter. “We expected to see a sharp rebound in trading revenues from the seasonally weak fourth quarter, as client demand is typically very strong in first quarters,” said Deputy Comptroller for Credit and Market Risk Kathryn Dick.

Ms. Dick noted that first quarter trading revenues were the second largest on record, trailing only 2009’s first quarter, a period during which intermediation spreads were unusually wide. Revenues from credit activities contributed meaningfully to trading performance as banks reported $2.7 billion in first quarter credit revenues, she said.

The OCC reported that net current credit exposure (NCCE), the primary metric the OCC uses to measure credit risk in derivatives activities, continues to decline. NCCE decreased $40 billion, or 10 percent, to $359 billion. NCCE peaked at $800 billion at the end of 2008, at the height of the credit crisis. “The continued decline in credit exposure reflects the more normalized conditions in credit markets that prevailed in the first quarter, when credit spreads continued to decline from crisis peaks,” said Ms. Dick.

The report shows that the notional amount of derivatives held by insured U.S. commercial banks increased by $3.6 trillion (or 1.7 percent) in the first quarter to $216.5 trillion. Interest rate contracts increased $2.4 trillion to $182 trillion, while FX contracts increased 6 percent to $17.6 trillion.

The report also noted that:

• Banks hold collateral to cover 67 percent of their NCCE. The quality of the collateral is very high, as 83 percent is cash (U.S. dollar and non-dollar).
• Derivatives contracts are concentrated in a small number of institutions. The five largest banks hold 97 percent of the total notional amount of derivatives, while the 25 largest banks hold nearly 100 percent.
• Credit default swaps are the dominant product in the credit derivatives market, representing 97 percent of total credit derivatives.
• The number of commercial banks holding derivatives increased by 20 in the quarter to 1,050.

Related Links

• OCC’s Quarterly Report on Bank Trading and Derivatives Activities: First Quarter 2010